Obama Administration’s FY 2016 Budget Proposals Would Continue Pressure on Firms that Do Business with Independent Contractors

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.

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.

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