Federal Bill Would Impose Stricter Requirements On Who May Be Classified As An Independent Contractor

by McGrath North Tax Group

(402) 341-3070

Rep. Jim McDermot of Washington recently introduced H.R. 3408, which would impose more stringent requirements on companies who wish to classify workers as an independent contractors rather than employees.  The classification of workers as independent contractors has been an accepted and long-standing business model for many financial broker dealers and other industries.

Rep. McDermot’s bill would amend Section 530 of the Internal Revenue Service Act of 1978 (commonly known as “Section 530”).  As currently enacted, Section 530 provides a safe harbor for employers who classify certain workers as independent contractors where the use of independent contractors is a “long-standing recognized practice of a significant segment of the industry in which such individual was engaged.”  Rep. McDermot’s proposal would require employers to obtain a written determination letter from the IRS, which addresses the classification of its workers, before relying on this safe harbor.  The bill would also markedly raise the penalties and fines for incorrectly classifying a worker as an independent contractor.

We understand that similar legislation has been introduced in the past, but died before receiving serious consideration.  However, because President Obama introduced a similar bill when he was in Congress, the prospects for this legislation look better than in past years.  We will follow this legislation and update you should this, or a similar bill, become law.

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