The NASE continues to push for clarification of the definition for independent contractor status for tax purposes so small-business owners can easily understand who is an employee and who is an independent contractor.

Background:
The NASE seeks to have Congress clarify the status of independent contractors. Many of our Members either use independent contractors or consider themselves to be independent contractors. Disputes about who is an employee and who is an independent contractor have cost small businesses more than three-quarters of a billion dollars in IRS fines and back-taxes during the past 10 years.

The existing law is supposed to provide employers with relief from potential IRS reclassification of a firm’s independent contractors as employees, by prohibiting the IRS from reclassifying such workers if the employer has a “reasonable basis” for its treatment of the workers as independent contractors.

A “reasonable basis” includes reliance on:

1. Judicial precedent or IRS rulings;

2. A past IRS audit in which there was no assessment attributable to employment taxes; and

3. A long-standing industry practice of treating the workers as independent contractors.

Unless firms can meet these "safe harbor" requirements, they must abide by the so-called “20 factor test” to determine who is or is not an independent contractor. Parts of this test are more than 500 years old. Over the years, the IRS also has chipped away at many of the supposed “safe harbors.”

Legislative Activity:
The NASE will work with legislators in the 109th Congress to introduce legislation, which would amend the tax code to simplify and clarify the definition of independent contractor.