Tax Relief Blog
New bill seeks to reduce worker misclassifications
H.R. 5804, 4/15/08 [Taxpayer Responsibility, Accountability, and Consistency Act of 2008] Rep. James McDermott (D-Wash) has introduced legislation that would revise employee vs. independent contractor rules and increase information reporting penalties The legislation is called the “Taxpayer Responsibility, Accountability, and Consistency Act of 2008,” and it primarily focuses on Section 530 of the Revenue Act of 1978. Under Section 530, employers that meet the following three requirements are protected from potentially large employment tax assessments, even though they incorrectly categorized a worker as an independent contractor: (1) reasonable basis, (2) substantive consistency, and (3) reporting consistency. An employer can meet the “reasonable basis” requirement if judicial precedent, IRS rulings, a past IRS audit, or industry practice supports the classification of a worker as an independent contractor. An employer meets the substantive consistency requirement if it (and any predecessor business) consistently treated the workers in question as independent contractors. The reporting consistency requirement is met if the employer has not classified the workers as employees on any required federal tax returns, including information returns.
New Rules. The new legislation would repeal Section 530 and replace it with a new Code section, IRC §3511, that would make it more difficult for employers to avoid employment tax liability if they misclassified a worker as an independent contractor. IRC §3511 would generally require employers to have a “reasonable basis” for classifying a worker as an independent contractor. The “reasonable basis” standard is met only if:
(1) The employer classified the worker as an independent contractor based on: (i) a written determination (as defined in IRC §6110(b)(1)) that it received addressing the employment status of either the worker in question, or another individual holding a substantially similar position with the employer; or (ii) an employment tax examination of the worker, or another individual holding a substantially similar position with the employer, that did not conclude that the worker should be treated as an employee; and
(2) The employer (or a predecessor) has not treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after Dec. 31, 1977.
