Independent Contractor Compliance Blog

What’s next?  I’m predicting withholding on IC’s and the repeal of Safe Harbor…

For years there has been talk in Washington of “amending” the Safe Harbor Provision of the Internal Revenue Code and of requiring income tax withholding on payments to independent contractors (those who receive a 1099). Looks like the politicians are making a serious run on it this year.

All of the following were outlined in federal budget proposals for Fiscal Year 2010:  

• Information Reporting (Form 1099) on payments made to corporations.

STATUS: This appears to be destined to be signed into law (H.R. 3590) after a long period of lobbying by the IRS.

• Repeal/amend the Safe Harbor provisions of the Internal Revenue Code.

STATUS: Introduced as Senate Bill 2882 on December 15, 2009, following a bill introduced on July 30, 2009, in the House (H.R. 3408), after a long period of lobbying by the IRS. Both bills are practically identical and effectively repeal Safe Harbor.

• Require withholding on all 1099 payments the same as is currently required for employee wages.

STATUS:  Although I’m not aware of a current bill, the IRS has been lobbying Congress to create third party withholding on IC’s for several years. All of the following statements have been made in IRS reports to Congress within the past two years…they should give you insight into the IRS’ position on IC Withholding:

•   …it would help sole proprietors and small corporations to withhold at the time payments are made to them.
• (The current system of)…quarterly estimated tax filing is relatively burdensome, especially for “less sophisticated and lower-income taxpayers.”
• …by the time estimated tax payments (or final tax payments) are due some independent contractors have not put aside the necessary funds, placing a distressing burden on the IC.
• (If there was IC Withholding)…when tax time came they wouldn’t be caught unable to pay their tax debts…

It’s all about “Leveling the playing field” and (more importantly from the IRS’ perspective) closing the “Tax Gap.”

The primary stated motivation for these proposals is to make it fair and easier for all.  However, all of the above proposals also:

1. Insure everyone is identified in “The tax system”
2. Make it more difficult to misclassify workers
3. Speed up/capture/increase tax revenue flow to the government

The need for increased tax revenue flow leads to more aggressive tax enforcement.  More aggressive tax enforcement leads to more tax audits and IC misclassification challenges. 

I am also predicting there will be other bills introduced to tighten down compliance for independent contractors. 

You need to be ready now. You should establish a proven system that insures proper IC classifications and maintains the necessary documentation to prove your case if challenged. Collabrus can help you implement this necessary system now, before it’s too late. 

It is too late after the tax auditor is knocking on your door.