Revision of tax code could have a major impact on how fleets use independent contractors
Our industry is talking about CSA 2010 and its impact. But there's another storm brewing: the Administration's plan to redefine “independent contractor.” In the proposed 2010 budget, one section highlights the need for the IRS to investigate businesses misclassifying employees as independent contractors. Estimates project that $7 billion or more of tax revenue over the next 10 years will be seen as a result of the actions. The IRS has started auditing several thousand companies regarding possible misclassification, and will hire 100 more IRS investigators to help conduct the work.
In January, Sen. John Kerry (D-MA) introduced the Taxpayer Responsibility, Accountability and Consistency Act of 2009 (S.2882), a bill to amend the Internal Revenue Code of 1986 to modify the rules relating to the treatment of individuals as independent contractors or employees, and for other purposes. One provision of this bill would be to strike or revise the Section 530 Safe Harbor Provision from the Revenue Act of 1978. This provision allows the use of independent contractors in construction and trucking; in fact, it is relied on heavily by trucking in the use of lease and lease-purchase operators.
So what does this mean to the small motor carrier? It depends on your business model. If you currently have only employee and/or company drivers, this will have minimal effect on your business. If this bill is passed and signed by President Obama, the only change would be the loss of lease operator status by your competitors. This could create additional hauling opportunities for your company if you position yourself correctly.
If you are currently using lease operators or have a lease-purchase program, however, this could have devastating consequences. You need to decide whether to go to all company drivers and manage the resulting changeover, or develop a completely different way of working with independent contractors that will pass muster with the IRS.
If you decide to go the second route, the transition will be long and challenging so you need to begin preparing now. There are currently three major areas determining whether a person is an employee or an independent contractor, but under the Section 530 Safe Harbor Provision, only a portion of these three areas must be satisfied to qualify as an independent contractor. Even now, it is a case-by-case, arbitrary decision by the IRS, but with the tightening of the provision or its complete repeal, plan on all three needing to be fully met to qualify for the independent contractor designation.
These requirements are:
Does the company control, or does it have the right to control, what the worker does and how the worker does his/her job?
Are the business aspects of the worker's job controlled by the payor? (This includes how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies.)
- Type of relationship
Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue? Is the work performed a key aspect of the business?
Will the true independent business trucker rise out of the ashes of lease operators, adding a whole new dimension to the industry? Only time — and Congress — will tell.
Contact Tim Brady at 731-749-8567 or at www.timothybrady.com