Survey, opinion and marketing research respondents who receive incentives could see more protections for their independent contractor status under recently introduced Congressional legislation.
"The Independent Contractor Tax Fairness and Simplification Act" (H.R. 6653), recently introduced by Rep. Erik Paulsen (R-MN-03), would solidify and expand protections for independent contractor status (such as for research respondents) in federal tax law that currently exist only in regulation (Section 530). H.R. 6653 has two parts: the codification of Internal Revenue Service (IRS) regulation Section 530 (as a new Section 3511 of the IRS Code) and the creation of a new safe harbor (as new Section 3512 of the IRS Code).
Codifying Section 530
The existing Section 530 regulation protects a business against federal employment tax liabilities with respect to a worker (including a respondent), provided that the business:
- Since 1978 has consistently treated the covered worker (and all other workers holding “substantially similar” positions) as nonemployees for federal employment-tax purposes (the “substantive consistency requirement”);
- For the tax year at issue, reported on a Form 1099 the amount of compensation the business paid to the covered worker during the year (of at least $600); and
- Treated the covered worker as a nonemployee in reliance on a "reasonable basis."
The first part of H.R. 6653 would differ from the existing Section 530:
- The Form 1099 requirement of Section 530 currently requires that in the case of periods after December 31, 1978, the taxpayer files “all federal tax returns (including information returns) with respect to covered workers on a basis consistent with such workers not being employees.” H.R. 6653 would modify this requirement by deleting the word "federal" immediately before the words "tax returns." Analysis: We are not sure why Rep. Paulsen sought to delete “federal,” which could create uncertainty as to whether the provision is satisfied only if all tax returns (federal, state and local, instead of only federal), are filed on a basis consistent with the taxpayer's treatment of covered workers as not being employees.
- The "substantive consistency" requirement of Section 530 currently requires that for any period ending after December 31, 1978, the taxpayer (or a predecessor) cannot have treated any individual holding a position that is substantially similar to the position held by a covered worker as an employee for purposes of the employment taxes for any period beginning after December 31, 1977. The bill would modify this requirement by changing 1978 to 2012, and 1977 to 2011. Analysis: The main effect of this change would be to create a fresh start for taxpayer relief, under which any violation of Section 530’s substantive consistency requirement that occurred during a period beginning on or before December 31, 2011, would not disqualify a taxpayer from Section 530 protection with respect to periods ending after December 31, 2012.
- H.R. 6653 retains Section 530’s prohibition against the Treasury Department and the Internal Revenue Service issuing “precedential guidance” clarifying the status of individuals for federal employment-tax purposes, but would permit the issuance of guidance interpreting the proposed new safe harbor. The bill also would delete language contained in Section 530 that provides that the prohibition against the issuance of guidance remains in effect only until such time that a law is enacted clarifying the employment status of individuals. Analysis: The deleted language presumably would clarify that the new law is not temporary. Section 530 was supposed to be a temporary regulatory fix until Congress could pass a permanent law.
- H.R. 6653 deletes certain provisions (enacted as part of the Pension Protection Act of 2006) that offer special treatment for purposes of Section 530 for test room supervisors and proctors for college entrance and placement exams. Analysis: We have been informed that, for tax periods beginning after the date of enactment of this legislation, the exemption would no longer apply.
New "safe harbor"
The proposed new independent-contractor safe harbor in H.R. 6653 would have a broader application than the existing Section 530 regulation. While Section 530 applies only for purposes of federal employment taxes, the new safe harbor would apply for purposes of federal employment and income taxes. While Section 530 applies only with respect to a taxpayer that contracts with an individual (but not the individual), the new safe harbor would apply with respect to the individual, the service recipient, and the payor of compensation to the individual, if different from the service recipient.
The proposed independent contractor safe harbor, under which covered relationships would be treated as independent contractor relationships, would be satisfied only if both of the following two requirements are met:
Requirement #1: The service provider--
(A) incurs significant financial responsibility for providing and maintaining the necessary equipment and facilities to perform the work outlined in their qualified agreement, and
(B) either-- (i) incurs unreimbursed expenses, or (ii) risks income fluctuations because the remuneration with respect to such service is directly related to sales or other output rather than solely to the number of hours actually worked or expenses incurred.
AND Requirement #2: The service provider--
(A) is compensated upon factors related to the work performed, such as a percentage of revenue or scheduled rates, and not solely on the basis of hours or time expended, and
(B) substantially controls the means and manner of performing the services, in conformance with regulatory requirements, the specifications of the service recipient or payor and any additional requirements specified in the qualified agreement.
For these purposes, H.R. 6653 defines a "qualified agreement" to mean a written contract between a service provider and the service recipient (or the payor) that provides that the service provider— (1) will not be treated as an employee with respect to such services for the purpose of the Internal Revenue Code, and (2) has been informed of the Federal tax obligations resulting from such treatment.
H.R. 6653 defines the term "service provider" to mean any individual or entity that performs service for another company under a qualified agreement, and clarifies that the terms service recipient and payor do not include any entity which is owned in whole or in part by the service provider.
Analysis: The proposed safe harbor could create added certainty for independent contractors who operate with a significant investment in their equipment and facilities, and who are compensated based on output or scheduled rates, but not hours worked. The proposed safe harbor likely could not be satisfied by service-based independent contractors who do not have significant financial responsibility for providing and maintaining the necessary equipment and facilities to perform the work, as they likely could not satisfy the “A” factor of Requirement #1.
MRA broadly supports H.R. 6653 as an improved protection for the independent contractor status of research respondents receiving incentives, although we suspect it could use some fine-tuning. We will be cooperating with our partners in the Coalition to Promote Independent Entrepreneurs to work with Rep. Paulsen in refining and then advancing this legislation in 2013.