The Gig Is Up Act, H.R. 8013, introduced on April 15, 2024, by Representative Bonnie Watson Coleman (D-NJ), would impose a new payroll tax on a covered business with respect to amounts it pays to independent contractors.[1] This is similar to a bill that Rep. Watson Coleman introduced in the 117th Congress, H.R. 5704.
A covered business for purposes of H.R. 8013 is a person that:
- has at least $100 million in gross receipts for a calendar year, and
- contracts with at least 10,000 individuals as independent contractors to provide services during the calendar year.
The bill would require a covered business to pay the employer share (7.65%) and the employee share (7.65%) of Social Security and Medicare taxes (i.e., Federal Insurance Contributions Act (“FICA”) taxes) with respect to any remuneration it pays such independent contractors with respect to their services (and any payments to such individuals in settlement of transactions for their services). The employer and employee share of FICA taxes (i.e., the double FICA taxes) owed by a covered business under the bill would be based on the gross amounts paid to an independent contractor.
This bill is problematic for the following reasons.
- The bill would – for the first time – impose a federal payroll tax on payments to independent contractors.
- This would represent a fundamental change in federal tax policy, which historically has imposed payroll taxes only on an employer with respect to amounts the employer pays its employees. It would undermine a bedrock distinction between employee status and independent-contractor status.
- While the double FICA taxes a covered business would owe under the bill would be calculated based on the gross amounts the covered business pays an independent contractor, the Social Security and Medicare taxes that independent contractors owe with respect to their earnings (i.e., Self-Employment Contributions Act (“SECA”) taxes) are calculated based on their net earnings from self-employment. In other words, SECA taxes are calculated based on an independent contractor’s net earnings – after subtracting from gross earnings related expenses.
- Accordingly, the double FICA taxes a covered employer would owe under the bill with respect to amounts it pays an independent contractor would exceed the SECA taxes the independent contractor would owe with respect to those same amounts – because the double FICA taxes would be calculated based on gross amounts, whereas the SECA taxes would be calculated based on net amounts (after subtracting related expenses).
- A covered business would owe twice the FICA taxes under the bill with respect to an amount it pays an independent contractor that a comparable employer would owe with respect to the same amount it pays an employee.
- This is because the covered business would owe both the employer and employee shares of FICA taxes, whereas an employer owes only the employer share and withholds the employee share from the amounts it pays its employee.
- The bill does not make any corresponding amendment to Internal Revenue Code section 1401, which imposes SECA taxes on an independent contractor’s net earnings from self-employment.
- Thus, it is not clear whether the bill would result in a double payment of Social Security and Medicare taxes with respect to amounts a covered business pays an independent contractor, namely, once by the covered business, in the form of double FICA taxes (calculated based on the gross amount), and again by the independent contractor, in the form of SECA taxes (calculated based on the net amount).
- While the bill would apply only to large businesses that contract with thousands of independent contractors, once such a bill were enacted, it could pave the way for new legislation expanding the new FICA-tax burden to other businesses.
- Once the infrastructure is created to accommodate a business paying FICA taxes to the Internal Revenue Service with respect to amounts it pays independent contractors, it could pave the way for new legislation expanding the payroll tax burden to include other payroll taxes, e.g., Federal Unemployment Tax Act (“FUTA”) taxes and income tax withholding.
Bills of this type, which would operate to undermine the fundamental distinctions under federal tax law between an employment relationship and a contract with a self-employed individual, are especially troubling. The erosion of such bedrock distinctions operates as a gradual elimination of an individual’s right to work as an independent entrepreneur – which traditionally has meant the right operate outside the scope of federal, state, and local laws that govern the relationship between an employer and its employee.
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If you have any questions or comments concerning the foregoing, please let me know, at [email protected] or (202) 659-0878.
The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.
[1] H.R. 8013 currently has 14 cosponsors – all Democrats.
