1099 Classification: Killing Fields to Fair Playing Fields in 2013-14 | DCR Workforce Blog

1099 Classification: Killing Fields to Fair Playing Fields in 2013-14

As we have discussed in a recent post, employers have been using non-employees and independent contractors for various genuine reasons. In many cases, they are seeking temporary access to talent only available to them if they agree to classify the worker as an independent contractor. These companies have no intent to wilfully and wrongly misclassify their workers, and should not have anything to fear from the IRS.

In our previous post, we expressed a hope that the IRS and other regulatory bodies would institute a clear and consistent set of worker classification criteria which companies could follow, making it easier to protect themselves from charges of misclassification and the need to adopt expensive damage control measures.

With due apologies for the irresistible but slightly far-fetched title of this post; I bring you the details of the Fair Playing Field Act of 2013 – which plans to amend the Internal Revenue Code and reviews the classification of workers for the purpose of employment taxes, in the following ways:

  1. Remove the prohibition established in the Revenue Act of 1978 against any issue of regulations and guidance by the Secretary of Treasury on matters of workers’ employment tax status (both for employees and independent contractors.),
  2. Seeks regulations and other guidance from the Secretary of Treasury  to clarify the proper employment status of workers for employment tax purposes,
  3. Prohibits a retroactive assessment of employment tax, except with respect to certain skilled workers, for tax periods between January 1, 1979 and a date to be specified when this law is enacted. This would not apply in cases where the taxpayer had no reasonable basis for not treating a worker as an employee,
  4. Requires taxpayers who hire independent contractors on a regular and ongoing basis to provide all those contractors with notice of their federal tax obligations, the labor and employment law protections that do not apply to them, and their right to seek a status determination from the Internal Revenue Service (IRS)
  5. Eliminates reduced penalty provisions for failure to withhold income taxes for companies who lack a reasonable basis for treating a worker as an independent contractor.

A bit of background on the intent of this bill is required. In 1978, Congress passed section 530 of the Revenue Act of 1978 as an interim measure to protect taxpayers – particularly small businesses – from hardships caused by the lack of clarity regarding the classification of some workers.  The objective of section 530 was to prohibit the Secretary of the Treasury from publishing regulations or revenue rulings on workers’ employment tax status pending the expected near-term enactment of clarifying legislation.  Over the past 33 years, these temporary prohibitions became permanent as the clarifying legislation was never developed or passed.  In the meantime, the issue of worker classification has become increasingly complex.

In Laymen’s Language this bill proposes that:

  • The Department of Treasury can issue guidelines clarifying the determination of the employment status of workers.
  • Employers can defend their classification of workers, as long as they have reasonable grounds for adopting such classification and have applied them in a consistent manner over the years.
  • Every single worker who is classified as an independent contractor must be formally informed of their duty to meet their federal tax obligations and their right to seek status determination by the IRS or other governing agency.. It is sure to eliminate any opportunity for defrauding the government through deliberate misclassification; taking advantage of a worker’s lack of knowledge in these matters.
  • ‘Amnesty Programs” currently in existence for companies found to have misclassified workers would be terminated.

At this time, no vote has been taken by the Senate on this bill, and it has been sent to the Committee on Finance.  If the bill manages to get adopted, employers will finally get to breathe a small sigh of relief.  They will finally able to confidently apply clear guidelines, reducing the possibility of unintentional errors that result in findings of by an IRS audit.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.