The Republicans just threw a bone to independent contractors with their new tax law. What does that mean for businesses? Let’s examine.
Strategy question for businesses: Now that tax law provides more favorable tax treatment to independent contractors (see more here), should business reclassify workers as contractors for 2018?
If that’s your reason, then no.
Suppose a new law required ice cream shops to give free cones to dalmation owners. This would be a stupid law, but stay with me.
If I paint dots on a yellow lab, do I get free ice cream?
No, of course not. Even I call my yellow lab a dalmation, it’s still a lab.
The ice cream law doesn’t change how you determine whether a dog is a dalmation, and the new tax law doesn’t change how you determine whether a worker is an employee or a contractor.
It’s true that from a worker’s perspective, the new tax plan favors independent contractor status over employee status. Many contractors operating as pass-through entities will be eligible for a 20% tax deduction (subject to caps), but employees don’t get that deduction.
Because of the change, more workers may prefer independent contractor status instead of employment. Some may ask to be reclassified. A worker’s incentive to be classified as a contractor instead of an employee may be particularly strong if the worker doesn’t need health insurance or other benefits that come with employment status.
But companies beware. Just because a worker prefers to be a contractor does not make it so. The revised tax code is not an invitation for companies to reclassify workers, and business that start converting workers to contractors may be in for a big, unpleasant, and expensive surprise.
Remember, just because two parties agree to call a worker an independent contractor does not make it so. Painting spots on your lab doesn’t make the dog a dalmation. (It does, however, make you a bad person. That’s a mean thing to do to a dog.)
Businesses that simply flip the switch on employment relationships and reclassify employees as contractors may be subjecting themselves to government audits or private claims alleging independent contractor misclassification.
While the tax plan grants more favorable tax treatment to pass-through entities (which may include legitimate independent contractors), the revised tax code does nothing to change the analysis of whether the worker is properly classified as an employee or contractor. The tests for independent contractor misclassification remain the same, and the penalties for misclassification remain the same. The IRS and state governments continue to view independent contractor misclassification as a problem.
Misclassification deprives federal and state governments from receiving tax revenues that they receive through employment taxes. Independent contractor misclassification remains an enforcement priority, and nothing in the tax plan changes that.
Businesses using contractors should not view the changed tax code as an invitation to reclassify employees as contractors. The tests for independent contractor misclassification are unchanged (see here and here and here). When a worker performs the same tasks, first as an employee and then as a contractor, that’s a bad fact. Businesses who misclassify workers remain subject to audits, lawsuits, and substantial penalties and damages. And those would be ruff.
For more information on independent contractor issues and other labor and employment developments to watch in 2018, join me in New York on Jan. 30, Los Angeles on Feb. 27, or Cincinnati on March 28 for the 2018 BakerHostetler Master Class on Labor Relations and Employment Law: A Time for Change. Attendance is complimentary, but advance registration is required. Please email me if you plan to attend, firstname.lastname@example.org, and list my name in your RSVP so I can be sure to look for you.
© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.