Taxing situation for independents

Feb 16, 2004 @ 12:01 am

By Bruce Kelly

The ``independent-contractor'' status of the 150,000 or so registered representatives who work as brokers affiliated with broker-dealers may be in jeopardy once again.

Such brokers aren't employed by a broker-dealer and are commonly referred to as independent registered representatives.

Buried in a recent report to Congress from Nina E. Olson, the Internal Revenue Service's national taxpayer advocate, was a recommendation that taxes be withheld for non-wage workers.

Such a move would place another new compliance burden squarely on the shoulders of broker-dealers at a time when they are reeling from regulation. It could also affect the culture of the entrepreneurial registered reps affiliated with independent-broker-dealer firms.

Of course, any change to laws concerning independent contractors would reach far beyond the financial services industry, said Dale Brown, chief executive of the Financial Services Institute in Atlanta, a new group representing independent-broker-dealer firms. He added that such a recommendation has a long way to go before ever getting introduced in Congress as legislation.

``It has to find a champion,'' Mr. Brown said. ``But the fact that this is even raised is a concern. It would add substantial cost and burden to independent broker-dealers.''

The recommendation flouts existing laws, he added. ``Reps have made the choice to be an independent contractor. As long as they follow the rules, the IRS has established the right to that business model.''

Such legislation could ``muddy the waters of independent-contractor status,'' said Robert F. Gannon, vice president and director of management services with the Securities Industry Association of New York and Washington. Speaking last month with executives of the SIA's independent-firms committee, he said that executives were unaware of the IRS' recommendations to Congress. About 70 of the SIA's 600 or so member firms are independent.

Since then, Mr. Gannon said, SIA member firms have voiced opposition to Ms. Olson's recommendations. ``This could add significant costs to broker-dealers,'' he said.

In her annual report to Congress, Ms. Olson said: ``The amount of unreported and underreported tax attributable to independent contractors - $81.2 billion - is the largest single component of the tax gap.''

To close that gap, she recommends creating a withholding ``scheme'' for independent contractors.

``The withholding rate would be 5% on payments to independent contractors not generally maintaining an inventory or receiving payments for material and supplies,'' according to the report.

Executives with independent broker-dealers and their advocates argue that slapping a withholding tax on affiliated registered representatives would fail to accomplish Ms. Olson's goal: the collection of missed taxes.

They argue that such unpaid taxes are prevalent in industries and jobs that pay cash. Independent broker-dealers, however, issue their affiliated brokers a 1099 tax form that details their earnings.

Therefore, ``they can't evade taxes,'' said Arthur F. Grant, president and chief executive of Cadaret Grant & Co. Inc. in Syracuse, N.Y., who is also a member of the SIA's independent-firms committee. ``Independent contractors pay their taxes,'' he said.

Still, it wasn't so long ago, in the mid-1990s, that independent-contractor firms fought a similar battle with the IRS to retain their reps' status as independent contractors.

To make its argument, the IRS pointed to NASD rules that said broker-dealers had to supervise a registered representative, Mr. Brown said. The IRS then argued that because of this supervision, the broker should be counted as an employee rather than an independent contractor.

In her report, Ms. Olson wrote that, ``Imposing a simple, flat-rate withholding requirement on independent-contractor payments levels the playing field between businesses that are currently bearing the cost of complying with the law and those who are shifting the tax cost to others.''



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