Independent Contractor Compliance Blog - by Collabrus™

Washington DC-Senator John Kerry, D-Massachusetts, and Representative Jim McDermott, D-Washington, have both introduced almost identical bills, in their respective houses, that would greatly limit the current provisions of the Section 530 Safe Harbor, require 1099 reporting of payments made to corporations and increase penalties against companies who misclassify workers.

The bills are HR 3408 and S 2882, if you’d liked to look them up and read the details yourself.

The IRS has been asking Congress for this Hunting License for several years

There have been similar bills introduced in the past several years, but they have been pushed aside in the seas of high priority legislation we’ve seen. The President himself co-authored such a bill when he was a Senator, but it was lost in the confusion of his election campaign.

Looks as if the idea is back.  This year President Obama has specifically asked Congress to enact tougher misclassification laws.

Both bills are nearly identical

Both bills require a Form 1099 to be issued to corporations on payments of $600 or more, effective in 2010 [except payments made to a hospital or extended care facility described in I.R.C Section 501(c)(3)].

The IRS has been seeking third-party reporting on corporations for a long time, telling Congress that it will lead to higher tax compliance.

The bills diminish current Section 530 Safe Harbor provisions

Specifically, a company may only claim Safe Harbor exemption for misclassifying a worker if:

1. The taxpayer did not treat the worker as an employee…ever.
2. All Federal tax returns (including information returns like Form 1099) were properly filed.
3. The taxpayer had a reasonable basis for not treating the worker as an IC.

Reasonable basis is defined in the proposed law as either:

• A written determination issued by the IRS saying the employment status of the worker, or another individual holding a substantially similar position with the taxpayer, was an IC
• A concluded examination (audit) holding the individual (or a substantially similar position) was an IC.
• The taxpayer (or a predecessor) has not treated any other individual holding a substantially similar position as an employee for purposes of employment taxes for any period beginning after December 31, 1977.

The bill also states that the taxpayer may not rely on either an examination results or a written determination to qualify for “reasonable basis” if any information given was not accurate (in the view of the IRS).

The bills put the Burden of Proof on the taxpayer to prove relief under this law.

Both bills also severely increase penalties

Both bills read identical on increasing the penalties the IRS may impose for misclassification.  It looks as if one of the lawmakers cut and pasted from the other’s bill for the penalties. The costs for different types of violations range from $500 to a maximum penalty of $3 million in certain situations-real money in anyone’s pocketboo.

I’m guessing this one will pass and be signed into law

This is at least the third time that I’m aware such a law has been proposed at the federal level in the past few years. With our current President and Congress, combined with the need to increase revenue, and I think there’s a chance this one will be a go….

If it does very few businesses will qualify for Safe Harbor under the new rules and the IRS will have its Hunting License.