House Ways & Means Committee Chairman Dave Camp’s (R-Michigan) much-awaited Tax Reform Act of 2014, introduced February 26, contains provisions that potentially threaten independent contractor status. Although it retains the existing Section 530 “safe harbor” protecting upstanding contractors from reclassification, it supplements it with alternate “safe harbor” terms that indicate a troubling direction in status determination, reviving complex and ambiguous “independence” criteria and making them available only if the service recipient withholds federal income tax from payments to the contractor.
Although the bill pitches this “safe harbor” as an alternative to Section 530, there is a strong possibility that some subsequent “reform”—or Committee negotiation—may see fit to substitute these foggy criteria for the relatively clean and objective criteria of the Section 530 safe harbor for all federal tax purposes.
The threats posed by the “income tax withholding” proposal are many: cash flow for (especially) small contractors, administrative burdens for service recipients, creation of a dangerous legal analogy between employees and contractors, and implicit incentives to cause contractors to change their business models in order to compete and operate profitably.
FRA and other members of the Coalition for Independent Entrepreneurs have requested a meeting with Chairman Camp to make clear to Ways & Means Committee leadership the implications of this item in the tax reform proposal. Look for updates and possible action calls as Capitol Hill’s dialogueon tax reform moves forward.