The following are lightly edited excerpts from the Administration’s Fiscal Year 2016 Budget Proposals that describe the provisions we believe would be of interest to independent entrepreneurs and their clients.
I. Internal Revenue Service
A. Increase certainty with respect to worker classification – Section 530 Repeal
The Administration proposes:
- to permit the IRS to issue generally applicable guidance about the proper classification of workers and
- to permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification is prohibited under the special provision [Section 530 of the Revenue Act of 1978].
- Penalties would be waived for service recipients with:
- only a small number of employees and
- a small number of misclassified workers,
- if the service recipient had consistently filed all required information returns reporting all payments to all misclassified workers, and
- the service recipient agreed to prospective reclassification of misclassified workers.
- It is anticipated that after enactment, new enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not be clear.
- Penalties would be waived for service recipients with:
Comment: The substance of this proposal is a repeal of section 530 of the Revenue Act of 1978.
Revenue Estimate: Five-year: 3.364 billion; Ten-year: $10.170 billion
Prior years’ revenue estimates
FY 2015 Revenue Estimate: Five-year: $3.138 billion; Ten-year: $9.610 billion
FY 2014 Revenue Estimate: Five-year: $2.942 billion; Ten-year: $9.097 billion
B. Improve information reporting for certain businesses and contractors
- The Administration proposes to require a contractor receiving payments of $600 or more in a calendar year from a particular business to furnish to the business (on Form W-9) the contractor’s certified taxpayer identification number (TIN).
- A business would be required to verify the contractor’s TIN with the IRS, which would be authorized to disclose, solely for this purpose, whether the certified TIN-name combination matches IRS records. If a contractor failed to furnish an accurate certified TIN, the business would be required to withhold a flat-rate percentage of gross payments.
C. Voluntary Tax Withholding for Independent Contractors
- Contractors receiving payments of $600 or more in a calendar year from a particular business could require the business to withhold a flat-rate percentage of their gross payments, with the flat-rate percentage of 15, 25, 30, or 35 percent being selected by the contractor.
D. Conform Self-Employment Contributions Act (SECA) taxes for professional service businesses
The self-employment tax system treats business owners differently according to the legal form of their ownership, rather than their operational roles in the business.
- The Administration proposes to tax owners of pass-through businesses providing professional services consistently, regardless of the legal form of the organization.
- Owners who provide services and materially participate in a business that provides professional services would be subject to self-employment tax on their distributive shares of income, as currently applied to general partners and sole proprietors.
- Owners who do not materially participate would be subject to self-employment tax only on an amount equal to reasonable compensation for services provided.
E. Expand IRS access to information in the National Directory of New Hires (NDNH) for tax administration purposes
- The Administration proposes to amend the Social Security Act to expand IRS access to the NDNH data for general tax administration purposes, including data matching, verification of taxpayer claims during return processing, preparation of substitute returns for non-compliant taxpayers, and identification of levy sources.
F. Index certain penalties under the Internal Revenue Code for inflation
- Effective for returns required to be filed after December 31, 2014, this Act indexes annually for inflation (subject to specified rounding rules) select fixed-dollar civil tax penalties for: … the failure to timely file correct information returns and payee statements.
- The Administration proposes to index all penalties for inflation and round the indexed amount to the next hundred dollars. This proposal would increase the penalty regime’s effectiveness in deterring negative behavior and would increase efficiency by eliminating the need to enact increases to individual penalties. While recent amendments to the Internal Revenue Code index select penalty provisions to inflation and resolve these issues for those few penalties, a more comprehensive approach is needed to achieve increased effectiveness and efficiency of tax penalties.
II. U.S. Department of Labor
A. Appropriations Request
- $10 million for activities to address the misclassification of workers.
B. Maintaining Strong Support for Worker Protections
- The Budget includes nearly $1.9 billion for the DOL’s worker protection agencies, putting them on sound footing to meet their responsibilities to defend the health, safety, wages, working conditions, and retirement security of American workers.
- The Administration is also pursuing a combination of executive and legislative actions to strengthen these laws and their enforcement, so workers can earn wages that will allow them to sustain their families, be protected from discrimination, return home safely at the end of a day’s work, and retire with dignity.
C. Strengthening Penalties for Those who Disregard Their Responsibilities to Their Workers
- The Budget calls for legislation to assess a $5,000 penalty per violation against employers that intentionally keep fraudulent wage and hour records or no records at all.
- In addition, the Administration will act on recommendations made by the Government Accountability Office (GAO) and the Administrative Conference of the United States by proposing to improve the Federal Civil Penalties Inflation Adjustment Act, which was established to maintain the deterrent effect of civil monetary penalties Government-wide through timely and predictable inflationary adjustments, but has fallen short because of its structure and implementation.
D. Modernizing Unemployment Insurance
The Budget proposes a suite of reforms to modernize the Unemployment Insurance (UI) program.
- The Budget includes a UI modernization fund that would provide incentive payments to States that adopt measures to expand both program eligibility and work-based learning opportunities and training for unemployed workers. A State can receive incentive payments if it adopts two measures that expand eligibility and two measures that improve connections to training and employment. States that maintain these changes for at least four years would also receive a bonus payment.
E. Building Evidence with Administrative Data
Funding is requested to provide support for ongoing Bureau of Labor Statistics programs and to:
- add an annual supplement to the Current Population Survey (CPS) to capture data on contingent work and alternative work arrangements in odd years, and on other topics in even years
- The Budget would require States that receive new Federal funding for UI modernization to allow broader statistical use of the UI earnings records they already provide to the Census Bureau for the LEHD. The UI reform package would also provide incentives for States to improve UI data quality and to take advantage of these data to provide UI recipients with better information on workforce opportunities.