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American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
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CCH® PAYROLL — 08/11/09

House bill would prevent improper worker misclassification

A bill that would remove a loophole, which allows employers to bypass the IRS's test of whether a worker is an employee or an independent contractor, was reintroduced in the House on July 30, 2009. Called the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408), the bill would make it more difficult for employers to avoid employment tax liability if they have misclassified a worker as an independent contractor and significantly increase employer penalties in the event of the misclassification.

Reasonable basis test

The bill would add a new section to the Code allowing employers to avoid employment tax liability only if they are able to demonstrate that they had a “reasonable basis” for classifying the independent contractor as an employee. This new Code Sec. 3511 would repeal the safe harbor provisions of current Section 530 of the Revenue Act of 1978. The “reasonable basis” standard would be met if:

• the employer classified the worker as an independent contractor based on: (i) a written determination that it received addressing the employment status of either the worker in question, or another individual holding a substantially similar position with the employer; or (ii) a concluded employment tax examination stating whether the individual (or one holding a substantially similar position) should be treated an employee.
• the employer (or a predecessor) has not treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after December 31, 1977.

For purposes of this new section, the determination as to whether an individual holds a position substantially similar to a position held by another individual would be made in accordance with the Fair Labor Standards Act. In addition, the bill provides that any individual who performs services for a taxpayer may petition (either personally or through a designated representative or attorney) for a determination of the individual's status for employment tax purposes.

Penalty increases

Among other penalties, employers that misclassify employees as independent contractors would be subject to a minimum $250 penalty (an increase from the current $50 fine) per incorrect tax return, up to $3,000,000 (currently $250,000) per year. The penalty imposed could be lowered if the employer's returns are corrected in a specified period of time. Employers with gross receipts not exceeding $5,000,000 would be subject to fines of up to $1,000,000 per year, up from the current $100,000 fine. Employers that intentionally disregard the filing requirement would be subject to a $500 fine per tax return, up from the current $100 fine. If enacted, the bill would apply to information returns required to be filed after December 31, 2009.

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