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Independent contractors: bill may solve the problem.

Possible relief is on the horizon for many small and medium-sized businesses that employ workers they classify as independent contractors. These employers have been walking a legal tightrope for years because the guidelines for distinguishing an independent from an employee often are ambiguous (see "A Taxing Matter: When Is a Worker an Independent Contractor?" J of A, May 91, page 34).

The Internal Revenue Service, which insists the guidelines are clear, says one in seven employers, either willfully or by mistake, misclassifies workers as independents. To make its point more emphatically, the IRS launched a high-priority campaign in 1988; it sent 750 revenue agents into the field to reclassify the workers and collect what it claims are taxes owed. The IRS says the campaign continues to be a financial success. Now a bill (HR 5011) has been

introduced in Congress to offer some employers tax amnesty for past classification errors and to make the rules easier to follow. If the bill passes-at this point its future is uncertain--even the IRS standsto gain. It's likely, because of the amnesty, many employers will "discover" their errors, reclassify independents as employees and pass along to the IRS the appropriate withholding tax. In addition, since the bill sets a higher penalty than the current law for failure to issue 1099 forms to independent contractors, the newly issued 1099s may prompt contractors to report their hitherto unreported income. Also, the minimum annual payment to a contractor for triggering a 1099 would be lowered to $100 from $600. That, too, should boost revenue.

Amnesty would be offered only if there is no evidence the employer intentionally violated the law by misclassifying a worker. In that case, instead of demanding back payment of payroll taxes, the IRS would levy a penalty of 2% of the worker's annual compensation or $500, whichever is less. If the IRS believes the violation was willful, the employer would be assessed the back taxes and other penalties.

The bill provides another plus for companies. Current rules bar the IRS from offering an employer guidance on whether a worker can be classified as an independent contractor. The proposed law eliminates that prohibition. That would help resolve situations when the line between independent contractor and employee is not clear.

--Stanley Zarowin
COPYRIGHT 1992 American Institute of CPA's
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Title Annotation:A Resource for Small Businesses
Author:Zarowin, Stanley
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Aug 1, 1992
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