Current Implementation of Tax Law
Employers act as agents for federal and state tax authorities to collect monies owed on W-2 income. For self-employed individuals no such third-party withholding exists so it is harder for tax authorities to ensure that the proper taxes are paid. This has resulted in a highly publicized campaign targeting independent contractors in the technology industry.Legislation was enacted in hopes of increasing revenue by convincing the majority of independent contractors to convert to being employees so that payroll taxes would be collected by employers. The General Accounting Office calculates the governmental loss to be approximately $20 million annually due to wrongly classified independent contractors. Large budget deficits have been a motivating factor to dedicate funds to loss-recovery efforts. The campaign to reclassify independent contractors as W-2 employees has already generated at least $500 million dollars in penalties and back taxes theoretically owed by corporate America. IRS reports indicate finding wrongly classified independent contractors in more than 90% of the firms they audit.
Such audits can be contested but often at a cost of many hundreds of thousands of dollars.
In May 1980, the federal and state governments began to cooperate to collect taxes owed. Under their reciprocal information-sharing agreement, information regarding audits was passed between federal and state authorities.
Differences exist between Federal and State Regulations
Adherence to two different sets of labor laws (federal and state) is required to be in complete compliance.
- California tax Department has an eleven question screening test ( publication DE 573 Rev. 8 dated 10/94).
- The IRS has a twenty-question test described as Common Law--Twenty Factors.
- States are not bound by Section 530 of the federal 1978 Revenue Act and so do not recognize the idea of "Safe Haven". Under the following labor laws, the definition of an employee varies but is generally less restrictive than the Common Law Factors used by the federal government: ERISA, -FLSA, -FMLA, -ADEA, -ADA, -WARN, - TITLE V11, -COBRA
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