Waynes World - April 2010
THE FEDERAL GOVERNMENT BEGINS GOING AFTER
MISCLASSIFIED INDEPENDENT CONTRACTORS, AND...
THE IRS & THE LABOR
DEPT. JOIN FORCES!
by Wayne Schooling
Back in May 2008, I warned everyone that this was coming, and now it is here. There are certain factions in this country that want to do away with independent contractors, one way or another, and it all comes down to money. One of the problems that arise in these cases, which deal with misclassified employees and independent contractors, is the fact that many judges, hearing officers and legislators feel that owner operators are being forced to be such by employers who see it as a way to avoid employment taxes, fringe benefits, etc. In some cases that might be true, but what these folks have failed to realize is that some people really wish to create their own destiny. They do not want to work for someone else. These people, for some reason, can’t grasp the idea of the value of entrepreneurship in trucking.
If you didn’t already know, the State Attorney General of California has a task force in California and has already sued about five or six local Southern California motor carriers. The carriers they picked on were mostly very small carriers who could be intimidated and did not have the financial backing to fight back. The one large carrier they chose did, in fact, fight back, and to the best of my knowledge, won their case. Fortunately, the State of California has not had too much success. But, now the federal government wants to step in and see what they can do. Now that the present administration has gone on their “mad hatters’ spending spree” it desperately needs money.
Since the Obama administration really does not want to raise or impose any new taxes right now, it has announced that it plans to begin a multimillion dollar push to crack down on employers who misclassify employees as independent contractors. The administration plans to create a joint task force with the Department of Labor and Internal Revenue Service to identify and audit employers who are simply trying to avoid paying taxes. The proposal calls for spending 25 million dollars to target misclassification with added enforcement agents, and pay out competitive “grants” to boost states incentives. In my opinion, this last part is just a politically correct way of saying it is going to pay a bounty to each state that helps with this program. Kind of reminds me of the old west.
Although it’s unclear exactly how many workers are misclassified, a 2009 study by the Government Accounting Office said that as many as 30% of employers audited in nine states during the year of 2000 had misclassified at least some of their workers. The Department of Labor estimated that the crackdown will increase federal taxes by more than 7 billion dollars over 10 years. Not a bad return on your money, if I do say so myself. During the 1983 tax year, for example, the IRS estimated that U.S. employers misclassified about 3.4 million workers, resulting in an estimated revenue loss of $1.6 billion in 1984 dollars.
Maybe this is Obama’s way to help pay for the national debt and the Health Reform Bill that he is going to stiff us with. The Washington Post recently reported, “President Obama’s proposed budget would add more than $9.7 trillion to the national debt over the next ten years.” So, going after employers using independent contractors would surely help the national debt. They say this crackdown focuses on all types of businesses, and that it does not target trucking – yea, right. And I want to sell refrigerators to Eskimos, too.
I have seen too many carriers that think all they have to do is issue 1099’s at the end of the year and that’s it. Those people are in for a huge surprise that could put them out of business. If you utilize the services of independent contractors and you are not sure if all of your bases are covered, you should contact an attorney who is familiar with these issues.
What makes these misclassification cases so complicated is the simple fact that most smaller companies and carriers do not know the difference between an employee, a common law employee, a statutory employee, a statutory non-employee, or an independent contractor – or that there are several different factors that are used to determine the status of an employee depending on what agency is doing the audit. There are the Common Law Rules, the U.S. Dept. of Labor, OSHA Standards, the California Common Law Test, State of California EDD Elements, IRS Twenty Common Law Factors, and the courts, which use the Restatement of Law criteria.
The only sure-fire way to combat this issue is to require your independent operators to incorporate. This also makes more business sense because it gives independent contractors more protection from lawsuits and it drops their tax rate. After all, why would anyone in their right mind want to be taxed at the higher sole proprietor rate of 34% or 39% when they could be taxed at the corporate level of only 15%? Being “independent” is at the core of every American – protect that right, before it’s too late!
If you would like more information about incorporating your business, please feel free to call me or our in-house CPA Department at 1-800-805-0040.
~ NTA is a name and organization you can trust. Not only is our website (www.ntassoc.com) an official US DOT Internet Training Site, but we are also the administrators of a Nationally Accredited Drug and Alcohol Program. If you have any questions, call me at (562) 279-0557 or send me an e-mail at wayne@ntassoc.com. Until next month, “Drive Safe – Drive Smart!”