In a recent report to Congress the Taxpayer Rights Advocate stated, “The IRS expects the number of individual returns from small business or self-employed taxpayers to grow by about 33 percent between 2006 and 2014, while the number of individual returns from other taxpayers is expected to decline by about two percent over the same period.”
The National Taxpayer Advocate recommended several new laws to prepare for this shift in the workforce and tax base. Several of them were:
- Repeal § 530 of the Revenue Act of 19781 and replace it with an Internal Revenue Code (IRC) provision providing a safe harbor applicable to both federal income and employment taxes, which allows the taxpayer to establish a reasonable basis for the classification.
- Increase the penalties for failure to comply with the information reporting requirements of IRC § 6041A.
- Increase the IRC § 6721(a) penalty for failing to issue Form 1099-MISC.
- Require stronger Information Reporting for Independent Contractors. The Taxpayer Advocate stated, “Increasing Form 1099-MISC reporting requirements would increase compliance among independent contractors.”
- Require service recipients to issue Form 1099-MISC to incorporated service providers.
- Allow income tax withholding from Form 1099-MISC payments.
IRS’ justification to Congress
The IRS report also stated, “Misclassification of workers can have serious consequences for the workers, the recipients of the services they provide, and tax administration in general. Whether a worker is classified as an employee or independent contractor affects the application of labor laws as well as tax treatment for both the worker and the service recipient. Worker classification rules are complicated and confusing…In addition to their complexity, existing worker classification rules do not serve the best interests of tax administration. Whether inadvertent or deliberate, the misclassification of employees as independent contractors has a significant revenue impact due to the difference in, and in many cases the absence of, information reporting and tax withholding requirements for independent contractors…”
Another point of view
Most IC’s are off the tax information grid if they are incorporated. The IRS, other government agencies, and politicians dislike this. Why? They want all payments reported, exposed to government, so they can properly tax and control them. With a substantial number of individuals moving to the IC column in the future they worry about losing touch with more payments.
The current federal and state financial predicament has made these issues more important. The times, they are a changing! Are you ready? If you haven’t already had a properly qualified professional, like Collabrus, assess your IC records to make sure your files are compliant and your workers are properly classified, I would suggest now is the time. If you are not 100% confident you have the skills and knowledge to properly classify your workers in-house, do not take on the risk! From my experience, companies can not afford to pay for this mistake!