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Employee or Independent Contractor?
Part Two

See also:
Employee or Independent Contractor? -- Part One
Employee or Independent Contractor? -- Part Three

          In response to the continuing concerns of smaller businesses confronting worker classification hassles with the Internal Revenue Service, Senator Christopher ("Kit") S. Bond, Chairman of the Senate Small Business Committee, and Senator Don Nickles have introduced in the United States Senate a bill styled the "Independent Contractor Tax Simplification Act." Senators Dole, D’Amato, Lott, Murkowski, and Inhofe joined as original cosponsors of this bill. A companion bill has been filed in the House of Representatives. And this proposed legislation has been endorsed by a coalition of 21 business and industry associations representing one million smaller businesses.

          Upon introducing this bill on the 13th of March, Senator Bond observed, "For years now, the Internal Revenue Service has used a 20 factor common law test to determine worker status. Frankly, Mr. President, the test is a nightmare of subjectivity and unpredictability for small business owners who often get their tutorial on the subtleties of this issue during an IRS audit. IRS agents consider 20 different factors to determine whether an employer-employee relationship exists. The problem is that the small business taxpayer is not able to predict which of the 20 factors is going to be most important to a particular IRS agent, and finding a certain number of these factors present in a case does not always determine the result. Inevitably, what has been happening is that agents are resolving too many cases in favor of the IRS tendency to find the existence of an employment relationship, at the expense and disruption of bona fide, independent contractor relationships."

          Billie Vester Rasbury is one of the thousands of casualties of these IRS intrusions. Bill’s Forestry Service of Fayette, Alabama, was a logging contractor for major wood-products companies, providing logs to local processing facilities at a fixed price per ton. In conformance with established industry practice, he contracted with workers as independent contractors paying them a per ton rate. However, the IRS eventually demanded over $200,000 as the retroactive payment of taxes the Service claimed he should have withheld, plus penalties and other levies. Ultimately, two Federal courts found the IRS was plainly wrong. The appellate court encapsulated the lower court’s decision, "The IRS lost about every way it could lose." While the IRS lost the case, the real loser was Billie Vester Rasbury. Bruce P. Ely, Rasbury’s attorney with the office of Tanner & Guinn in Tuscaloosa, concluded, "He lost it all -- his business and his dignity." The IRS drove Bill’s Forestry Service into bankruptcy.

          Senator Bond emphasizes that "... the independent contractor issue is not about how much tax the government receives. The classification decision does not alter aggregate tax liability to the government at all. This problem exists because of IRS’s apparent desire to recast economic relationships between private parties that these parties have already determined for themselves. The Independent Contractor Tax Simplification Act will help move the IRS out of its 'de facto' role of setting employment policy and back into its role of revenue collection."

          This proposed legislation defines three simple questions to be posed to determine whether a person providing services to another is an employee or an independent contractor:

  1. Is there a written agreement between the parties?
  2. Does it appear the worker has made some investment, e.g., purchase of tools and equipment, incurring significant unreimbursed expenses, or being compensated primarily on the basis of commissions?
  3. Does the worker appear to have some independence, e.g., other customers/clients, his/ her own place of business, or flexibility in where or when to work?

          If these three criteria are satisfied, then the worker is an independent contractor. According to Senator Bond: "Plain, simple, predictable and final."

          Of course, to be qualified for these simple guidelines, the parties must continue to report all payments for services in excess of $600 annually to the Internal Revenue Service (Form 1099) in conformance with the current Code. This guarantees that all taxes can be collected that are properly due to the United States Treasury.

          The employee versus independent contractor issue was voted first on their list of recommended reforms by the delegates at the 1995 White House Conference on Small Business. This proposed legislation appears to offer the smaller business and entrepreneurs the relief that has been sought for decades -- at no cost to the Treasury. This long-overdue correction will lay the foundation for longer-term job creation and entrepreneurial expansion.

Your comments and suggestions for these pages are most welcomed!

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Thomas A. Faulhaber, Editor

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