Tax status of indie contractors requires clarification

Misclassification of workers as independent contractors remains on the list of top issues that the National Taxpayer Advocate recommends that Congress address in its 2008 annual report to Congress, which was released today < http://www.irs.gov/advocate/article/0,,id=202276,00.html>. Many financial advisers who work for brokerage firms are classified for tax purposes as independent contractors, and the issue of how to treat such workers has raised concerns in the past among broker-dealers. The taxpayer advocate, an office in the Internal Revenue Service that seeks to bring attention to the biggest tax problems, suggested that Congress require the Department of The Treasury to issue guidance as to whether particular types of workers in specific industries should be classified as independent contractors. Businesses are only required to pay employment tax, withhold income tax and provide benefits for employees, which often leads them to classify workers as independent contractors to reduce their costs, the report said. In addition, “Some employees, seeking to avoid their tax obligations, may also prefer to be classified as independent contractors if the employer does withhold taxes or report the payments to the IRS,” the report said. The IRS should develop a reliable system for determining worker classifications, and both employers and employees should be able to request classification determinations and challenge them in the United States Tax Court, the report said. It also recommended more public education campaigns to increase awareness of tax rules regarding worker classifications. As it has said in the past, the taxpayer advocate said that complexity of the tax code is the biggest tax problem in the United States, and it recommended repeal of the alternative minimum tax for individuals as the top legislative priority. Simplifying and streamlining savings tax incentives for retirement and education were also listed as top priorities. Congress should consider establishing one retirement plan for individual taxpayers, one for plans offered by small businesses, and one for large businesses, eliminating plans that are limited to government entities, and uniform rules should be established for withdrawals, loans and portability, the report suggested.