Independent contractor safe harbor proposal.

• Author: Winton, Lisa A.

Introduction

The American Institute of Certified Public Accountants (AICPA) appreciates this opportunity to testify on the issue of classification between independent contractor and employee. We commend your timeliness in holding this hearing on an issue which was designated by delegates attending the White House Conference on Small Business as the one most in need of Congressional attention. The AICPA is the national professional organization of CPAs, with over 320,000 members. Many of our members are tax practitioners who work with millions of American taxpayers--individual and business. We appreciate this opportunity to express our commitment and support for the concept of voluntary compliance. By reducing complexity through clarification of definitions to prevent misclassifications of independent contractors, we believe that greater compliance will be achieved.

We have, for several years, supported legislation that would (1) offer a safe harbor for business people to provide certainty in business decision making, (2) modify the prior audit rule of Section 530 of the Revenue Act of 1978, which protects taxpayers against retroactive reclassification of workers as employees, (3) give the Secretary of the Treasury the authority to define the term "employee" by regulation, and (4) achieve conformity in the definition of employee for income tax, employment tax and health care purposes.

In addition, we are deeply concerned with the amount of unreported income resulting in part from failure to file Forms 1099, as well as attempts by the IRS to classify independent contractors as employees. Accordingly, we support a provision to increase penalties for failure to file correct information returns with respect to nonemployees.

Section 530 of the Revenue Act of 1978 currently provides safe harbors which allow workers to be deemed independent contractors in certain situations. However, these safe harbors are available to very few businesses and, even if available, do not solve other problems such as fringe benefit issues. Current initiatives by the IRS which designate critical factors for determining independent contractor status for specified industries are not sufficient to safeguard small business and in fact may complicate their compliance efforts. Small business is an industry by itself and it needs a comprehensive all-encompassing safe harbor regardless of industry. The AICPA therefore supports the adoption of a simple safe harbor, which, if...