Newspaper article The Christian Science Monitor

Helping Small Businesses

Newspaper article The Christian Science Monitor

Helping Small Businesses

Article excerpt

RAYMOND KANE owns a travel agency in New York. Like many travel agents, for years he has rented space to independent agents who work for themselves but pay him a percentage of their commissions. His agency issues 1099 forms reporting to the Internal Revenue Service the amount it pays the independent contractors after deducting their rent and the commission percentage. In 1991, Mr. Kane got notice from the IRS that the firm would be audited for the year 1989. An IRS auditor spent six months at the agency scrutinizing the contracts between it and the independent contractors. After the audit, the IRS issued a "no change" finding, meaning that Kane's firm was in compliance with IRS regulations, including those governing independent contractors. Imagine Kane's surprise, then, when two years later the IRS told him that the agents were no longer independent contractors but were, and had always been, employees for whom his agency should have been deducting and paying taxes. Even though the agents had paid their own taxes, the IRS is demanding $274,000 in penalties from Kane's company for 1992-94. More than 5 million Americans work as independent contractors, but no law defines who qualifies as one. Over the years, the IRS has evolved a 20-point common-law test for determining who is independent and who is an employee. But interpretations vary from office to office. According to Sen. Christopher Bond (R) of Missouri, who chaired hearings last week on tax issues affecting small businesses, the IRS has in recent years forced the reclassification of some 400,000 independent contractors as employees, and is currently forcing the conversion of almost 2,000 a week. Sen. Don Nickels (R) of Oklahoma calls it an IRS "war" on independent contractors, "the heart and soul of small business." The IRS is legitimately concerned about the number of self-employed people who underreport their income or don't pay taxes. But forcing them to convert to employee status to make it easier for the IRS to ensure payment is not the answer. The answer is for Congress to write a definition of independent contractor that everyone can understand and implement. …
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