Sen. John Kerry (D-Mass.) has introduced legislation that would make it more difficult for employers to classify workers as independent contractors for employment tax purposes. The Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S. 2882) would revise section 530 of the Revenue Act of 1978, known as the “safe harbor” provision, which currently allows employers to designate workers as independent contractors “regardless of the worker's actual status under the common law test, unless the employer has no reasonable basis for such treatment or fails to meet certain requirements,” according to a statement issued by Sen. Kerry’s office.

Under the terms of this legislation, an employer’s decision to classify a worker as an independent contractor would be deemed “reasonable” if the employer reasonably relied on a written determination addressing the employment status of the individual or another individual holding a substantially similar position with the employer, or a concluded employment tax examination that did not find that the individual (or one holding a substantially similar position) should be considered an employee. In addition, the employer or its predecessor must not have treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after December 31, 1977. The assessment of whether an individual holds a substantially similar position held by another would be made using criteria established by the Fair Labor Standards Act.

This legislation would also strengthen employer reporting requirements. Businesses that pay more than $600 during the year to corporate providers of property and services would be required to file an information report with each provider and the Internal Revenue Service (IRS). In addition, the bill would allow individuals deemed independent contractors to petition the IRS for a determination of whether they are properly classified as independent contractors, and would significantly increase employer penalties in the event of misclassification. Such misclassification penalties include the following:

• Minimum of $250 (up from the current $50) per incorrect tax return, up to $3,000,000 (currently $250,000) per year. Lower penalties would be imposed if the returns are corrected within a specified period of time, although the amounts are significantly greater than those currently imposed on employers for misclassification.
• Smaller employers (those with gross receipts not exceeding $5,000,000) would be subject to fines of up to $1,000,000 per year, up from the current $100,000 limitation.
• In the event of intentional disregard for the filing requirement, employers would be subject to a $500 fine per tax return, up from the current $100 amount. The $3,000,000 per year penalty ceiling would not apply in this instance.

A similar measure with the same title was introduced in the House of Representatives in July. The new Senate companion bill has been referred to the Senate Committee on Finance.

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