The Congressional subcommittee on Income Security and Family Support began hearings today on the Effects of Misclassifying Workers as Independent Contractors. In conjunction with the hearing, the Joint Committee on Taxation prepared a report on the Present Law and Background Relating to Worker Classification for Federal Tax Purposes. (nod to Prof. Paul Caron (Cincinnati) of the TaxProf Blog).
The report from the Joint Committee on Taxation discusses the current elements of the facts-and-circumstances test which determine whether an employee is properly classified as an independent contractor. For qualified plan purposes, most pre-approved plans contain specific language on whether an independent contractor is included in the plan’s definition of employee. The standard plan language normally follows the definition of Employee contained in Treasury Regulation 1.410(b)-9, which states:
Employee. “Employee” means an individual who performs services for the employer who is either a common law employee of the employer, a self-employed individual who is treated as an employee pursuant to section 401(c)(1), or a leased employee (not excluded under section 414(n)(5)) who is treated as an employee of the employer-recipient under section 414(n)(2) or 414(o)(2). Individuals that an employer treats as employees under section 414(n) pursuant to the requirements of section 414(o) are considered to be leased employees for purposes of this rule. In addition, an individual must be treated as an employee with respect to allocations under a defined contribution plan taken into account under section 1.401(a)(4)-2(c)(ii) and with respect to increases in accrued benefits (within the meaning of 411(a)(7) under a defined benefit plan that are based on ongoing service or compensation (including imputed service or compensation) credits.
One of the interesting proposals is for a check-the-box agreement between the employer and the independent contractor affirmatively acknowledging that the worker is an independent contractor instead of applying the current facts-and-circumstances test.
One of the interesting parts of the report by the Joint Committee on Taxation is a mention of Section 864 of the Pension Protection Act, titled “Treatment of Test Room Supervisors and Proctors Who Assist in the Administration of College Entrance and Placement Exams”. In large tax laws, there are sometimes odd items contained in the Act and this was one of those odd items that caught my attention when I first read through the Pension Protection Act.
The Joint Committee on Taxation, in discussion Section 530 of the Revenue Act of 1978, states:
Section 530 of the Revenue Act of 1978 (“section 530”) generally allows a taxpayer to treat a worker as not being an employee for employment tax purposes (but not income tax purposes), regardless of the worker’s actual status under the common-law test, unless the taxpayer has no reasonable basis for such treatment or fails to meet certain requirements.
Section 864 of PPA is mentioned in the same section of the report as:
Under section 1706 of the Tax Reform Act of 1986, section 530 does not apply in the case of a worker who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. Thus, the determination of whether such workers are employees or independent contractors is made in accordance with the common-law test.
Under section 864 of the Pension Protection Act of 2006, the similar worker consistency requirement does not apply with respect to services performed after December 31, 2006, by an individual who provides services as a test proctor or room supervisor by assisting in the administration of college entrance or placement examinations. This exception only applies if the service recipient is an organization that is described in section 501(c) and the service provider is not otherwise treated as an employee of the organization for employment tax purposes.
The Technical Explanation to PPA provides this explanation of Section 864:
Under the bill, section 530 of the Revenue Act of 1978 is amended to provide that in the case of an individual providing services as a test proctor or room supervisor by assisting in the administration of college entrance or placements examinations, the consistency requirement does not apply with respect to services performed after December 31, 2006 (and remuneration paid with respect to such services). The provision applies if the individual (1) is performing the services for a tax-exempt organization, and (2) is not otherwise treated as an employee of such organization for purposes of employment taxes. Thus, under the bill, if the requirements are satisfied, the IRS is prohibited from challenging the treatment of such individuals as independent contractors for employment tax purposes, even if the organization previously treated such individuals as employees.
It is almost law review article worthy to explore how individuals providing services as test proctors or room supervisors assisting in the adminstration of college entrance or placement examinations created enough Congressional concern to have a section of PPA devoted to ensuring that they are treated as independent contractors. [tags]Pension Protection Act, independent contractor, proctor, employee, 410(b), 401(a)(4), participant, retirement, pension, ppa[/tags]
