The independent-contractor tax status of financial advisers who are affiliated with independent firms is safe for the foreseeable future.
Congress closed out its session without acting on a bill that
would have given the
Internal Revenue Service authority to make employee classification determinations about tax status through regulatory guidance — an authority the IRS now lacks.
The Financial Services Institute Inc. made it a top priority to quash the Fair Playing Field Act of 2010, which was sponsored by Sen. John Kerry, D.-Mass., and Rep. Jim McDermott, D-Wash.
In addition to FSI members' sending about 8,500 e-mails and letters to senators, 15 to 20 members met with their congressional representatives between August and December to tell them about the damages such a bill would have on their industry, said FSI chief executive Dale Brown. As the 111th Congress is ending without having approved the bill, it's likely a dead issue for at least two more years, he said.
“We think the environment in the 112th Congress will make it less likely that we'll see any movement on this,” said Mr. Brown, referring to the political realities of having a House of Representatives led by Republicans and the Senate and White House controlled by Democrats.
Some industries probably do abuse the tax rules and misclassify their workers as independent contractors, said Mr. Brown. But financial advisers “have a three-decade track record of complying with IRS rules” without any history of misclassification, he said.
“We want lawmakers to deal with industries that are misclassifying workers, but don't do it this way that catches everyone in the net,” Mr. Brown said.
For advisers, the independent model offers lower fixed costs for broker-dealers as it eliminates the need to pay rent on a branch office network or staff salaries. These costs are instead borne by the reps in exchange for high commission payouts.
For instance, reps at
LPL Financial and
Raymond James Financial Services Inc. are paid as independent contractors and are responsible for their own business costs, whereas reps at firms such as Morgan Stanley Smith Barney LLC are employees.
This independent-contractor tax provision was reportedly used by FedEx Corp. in escaping a $319 million back tax assessment by the IRS related to the classification of the shipper's ground division drivers. The IRS concluded that such drivers were common-law employees, however, it withdrew its assessment based on the protection afforded FedEx under current law.
Proponents of the legislation believe it would collect additional tax revenue and protect workers from losing benefits if they are being treated as independent contractors rather than employees.
