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Increase Certainty with Respect to Worker Classification

For over 30 years (under Section 530 of the Revenue Act of 1978—not in the Internal Revenue Code) the Internal Revenue Service has been prohibited from issuing guidance regarding the classification of workers as either employees or independent contractors. In addition, a service recipient may continue to treat a worker as an independent contractor, even though he or she may actually be an employee, as long as the service recipient has a reasonable basis for doing so and certain other requirements are met. The Internal Revenue Service may not reclassify either this worker or new hires in the same position.

Misclassification may deny the worker certain benefits to which employees are entitled such as unemployment insurance and workers' compensation. Avoiding these obligations may provide a competitive advantage to employers who have misclassified workers. The situation also increases opportunities for tax avoidance because employers need not withhold taxes on payments to independent contractors.

The proposal would give the IRS authority to require prospective reclassification of worker and to issue general guidance as the proper classification of workers under common law standards. The provision would be effective on enactment subject to a transition rule for workers subject to the existing special provision.