Repealing Section 530 Protections for Independent Contractors’ Status Will Hurt Jobs, NOT Reduce the Deficit
The President’s deficit reduction proposal[1] would “increase certainty with respect to worker classification” by repealing Section 530 of the Revenue Act of 1978, the safe harbor provision that allows employers to classify service providers as independent contractors rather than employees. The President’s proposal mistakenly estimates that these changes would result in an $8 billion increase in revenue over ten years.
Background
Independent contractors – the quintessential small business people[2] – play an important role in survey and opinion research, whether as field ethnographers, focus group moderators, or general research consultants. More fundamentally, any research participant receiving an incentive could conceivably be considered an independent contractor.
Section 530 provides both parties to an independent contractor relationship with absolute certainty that such status will be respected by the Internal Revenue Service (IRS). As long as the income paid an individual is reported on Forms 1099-MISC, the federal government shouldn’t care whether an individual performs services as an employee or independent contractor. The FICA/SECA tax treatment of each is now substantially the same and their respective tax-compliance rates are more or less the same.
The certainty that Section 530 provides enables companies and self-employed service providers to enter into business relationships that they know will be respected for federal employment-tax purposes. A certain and predictable regulatory environment for independent contractors inures to the benefit of independent contractors, the companies that purchase their services and our nation’s economy.
About 1 in 9 American workers are self-employed
According to Current Population Survey data from the Bureau of Labor Statistics (BLS), 14.2 million individuals were self-employed in September.
MRA’s position: Congress must respect and protect independent contractor relationships by maintining Section 530 and rejecting the President’s proposal.
- Section 530 Is Not a “Tax Loophole” and Repealing It Won’t Reduce the “Tax Gap”:
- Section 530 has rigorous eligibility requirements that are not easily satisfied.
- Rather than providing a loophole, Section 530 actually enhances tax compliance by demanding tax reporting compliance as a condition of eligibility. IRS data show 97% compliance rate for recipients of Forms 1099, versus 99% for those of Forms W-2 and most of the “tax gap” for the self-employed comes from the unreported cash economy.
- Why penalize currently compliant taxpayers while leaving untouched the noncompliant?
- Repeal could also result in newly established companies electing to “fly under the radar” by not issuing any Forms 1099, absent any Section 530 incentive to do so.
There is no rational basis for the President’s $8 billion figure. In fact, repealing Section 530 would likely lead to an increase in black market (unreported and untaxed) income and a significant decrease in reportable, taxable income.
[1] http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/jointcommitteereport.pdf
[2] Independent contractors are a type of small business – one of the most vibrant sectors of our economy, supplying innovation, job creation, and economic growth. Over half of U.S. employment comes from firms with less than 500 employees, and all net new job creation comes from small business.