Newspaper article THE JOURNAL RECORD

Should Congress Clarify Definition of Contractor?

Newspaper article THE JOURNAL RECORD

Should Congress Clarify Definition of Contractor?

Article excerpt

Independent contractors or employees? It makes a difference.

Under current law, workers are classified as employees or independent contractors in one of three ways -- explicit statutory classification, statutory "safe harbors," or the "20-factor common- law test."

The 20 common-law factors are considered by many to be subjective and inconsistently applied by the Internal Revenue Service. As a result, businesses that unintentionally misclassify workers are often subject to back taxes and severe penalties. In fiscal year 1989, the IRS reclassified 76,000 workers from independent contractor status to employee status and imposed $93.8 million in assessments. From 1987 to 1991, proposed assessments from IRS reclassification totaled $467 million. The General Accounting Office estimates that the U.S. Treasury loses more than $1.6 billion in taxes each year because of employee misclassification Classification of workers is critical because businesses are required to withhold income taxes and pay FICA (Social Security and Medicare) and FUTA (unemployment) taxes for employees, but not for independent contractors. In addition, the classification may also affect workers compensation, labor relations and health insurance. The 105th Congress will focus on this issue in the coming session. The independent contractor issue was voted one of the top 10 issues facing small businesses at the 1995 White House Conference on Small Business. Every small business association has found in member surveys that the independent contractor issue is of utmost importance. Accounting practices are often asked these questions by small business owners. Is someone an independent contractor or an employee? Am I required to withhold taxes, or can I pay the individual directly and issue them a 1099 at the end of the year? That is, the employer pays the individual, but does not withhold any taxes. It then becomes the responsibility of the individual to remit their estimated taxes quarterly. The IRS has been auditing many companies in the past few years that have traditionally paid many individuals as independent contractors. If they find that the individuals that have been paid by 1099's are employees, the company can be assessed large penalties and have to pay Social Security and Medicare taxes, which have already been paid by the individual with their tax return. …

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