Independent contractor provision cut from budget
September 1, 1997 5 minutes read
Independent contractor provision cut from budget
Would have simplified worker classification
Looking for a simpler rule to classify workers as independent contractors? Don’t ask this session of Congress for help. A provision in the new tax bill that would have reformed complex independent contractor rules was dropped in the final stages of the tax agreement.Many private duty agencies hire physical and occupational therapists as independent contractors. Several have found themselves on the wrong side of the Internal Revenue Service (IRS), when an audit determined that the therapists should have been classified as employees.
"There are a number of cases involved with that issue," says Elizabeth E. Hogue, JD, a health care attorney specializing in home care in Burtonsville, MD. "The audits are going on all the time."
The provision in the budget agreement would have given employers greater flexibility to define certain workers as independent contractors. The National Federation of Independent Business and other business groups lobbied for the provision, saying it would vastly simplify complex IRS rules that require employers to go through a 20-step analysis to determine if a worker is an employee or independent contractor.
The rationale for abandoning the proposed simpler independent contractor definition was that employers would use the new legislation to convert workers previously classified as employees to independent contractor status, thereby causing them to lose employee benefits.
"Reclassifying workers as independent contractors would lead to the doubling of their Social Security and Medicare taxes," Sen. Edward Kennedy (D-MA) says in a statement. "They would lose access to unemployment insurance and workers’ compensation benefits. This makes a bad bill even worse."
Others disagree. "The original legislation introduced by Rep. John Christensen [R-NE], although not a cure-all, was a major step in the right direction because it did a better job of protecting businesses that utilize independent contractors from being forced to convert these contractors to employees, creating significantly greater tax liabilities and hence jeopardizing the ability of these firms to compete," responds Barry H. Frank, Esq., head of the Independent Contractor Group at the Philadelphia-based law firm Mesirov Gelman Jaffe Cramer & Jamieson, in a statement.
Frank says that given the bill’s strong support, he would hope that the legislation would be reintroduced as part of some other legislative package in the next session of Congress.
Be careful about classifying
An employer must generally withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment taxes on wages paid to an employee. Generally, an employer does not have to withhold or pay any taxes on payments to independent contractors.The classification "independent contractor" means, for example, therapists who work without supervision or without a set schedule, says Linda Donev, a consultant with Home Healthcare Architects in Boca Raton, FL. "They direct their own work."
Agencies use therapists on an independently based on the fact that they are professionals and they are qualified under their licenses to direct their work, she adds.
One private duty home care administrator who uses therapists as independent contractors says they bill her agency in a lump sum for visits. "All they’re supposed to do is give us the notes. We don’t have control of their actual schedule — the time and day of care."
Private duty agencies, though, need to be meticulous about how they are classifying their workers, advises Hogue. "You need to be careful that the workers are truly independent contractors according to a number of tests published by the IRS."
Hogue says she has been involved in situations with independent contractors where the agencies seem to have too much control over the workers.
"The agencies could not show that the employees set their own schedules," she says. "Agencies also have trouble showing that the independent contractor runs the risk of nonpayment, meaning that if the patient does not pay, the worker is not paid."
In addition, IRS auditors have looked at instances where the agency was providing inservice training or collecting visit notes and said this constituted supervision.
"The key problem may be that in many cases, the IRS requires that independent contractors must be able to fulfill whatever the assignment is on their own time and own schedule," Hogue says. "It might be tough to meet that criteria."
General classification guidelines
To determine whether an individual is an employee or an independent contractor under the common law, the IRS stipulates that all evidence of control and independence in the relationship between the worker and the business be examined.The 20-step analysis has been criticized by employees as being too vague. So many employers have turned to the IRS’ Employers Supplemental Tax Guide, also known as publication 15-A. In the guide, the IRS names the following key determinants of the "employee or independent contractor" question:
• Behavioral control.
An employee is generally subject to the business’ instructions about when, where, and how to work.
• Financial control.
An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job.
An independent contractor also often has a significant investment in the facilities he or she uses in performing services for someone else. He or she can also make a profit or loss.
• Type of relationship.
Employees receive benefits such as insurance, a pension plan, vacation pay, or sick pay.
If a worker provides services that are a key aspect of your regular business activity or if you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.
Hogue says she has wondered why the IRS is so aggressive about the independent contractor issue. "On the one hand you can ask, why is the IRS doing this?’ They’ll get the money one way or another — from the employer or from the independent contractor."
One IRS auditor finally told Hogue that the IRS’ audit policy indicates that it is more likely to get its money if the person is classified as an employee as opposed to an independent contractor.
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