Note: This is part one of a two-part blog on this subject. To read part two, click here.
Recently, I’ve seen a new issue emerging on the advocacy landscape for our industry which relies heavily on the independent contracting model. The U.S. Department of Labor and Internal Revenue Service (IRS) are targeting small businesses like ours to ensure they are classifying employees on their taxes accurately. This initiative was started because a small number of businesses were found to be abusing the classification laws by reporting full-time employees as contractors in order to avoid payroll taxes and employee benefits.
Because we represent the industry’s compliant and committed professionals, we appreciate the laws on the books regarding worker classification being enforced. The Missouri Department of Labor and Industrial Relations maintains online resources and provides training regarding worker classification which can be very useful to small business compliance. But it is important that this federal enforcement initiative not become a movement to imply that all independent contracting businesses are intentionally misclassifying workers, as most are not. This could also lead to a scenario where the appropriate focus on catching a few bad apples morphs into a regulatory squeeze that makes it nearly impossible for the majority of law-abiding contractors to function.
The buzz I’m hearing also indicates that small businesses are being targeted over large corporations because the government believes they are faster and easier to audit, have less resources to fight back and are more likely to evade taxes. If true, this is truly unfortunate because small businesses like ours have a long history of being the nation’s primary job creators. In fact, from 2000-2010, small businesses were responsible for 75 percent of all new jobs created, according to a U.S. Small Business Administration study released in 2010.
Below is an excerpt from information issued by the Missouri Chamber of Commerce regarding this issue:
“Across the nation, ‘enforcement initiatives,’ which are a part of President Obama’s 2012 budget, are being considered in an attempt for the IRS to raise $7.3 billion by pursuing independent contractor violations. Consequently, it appears the IRS will mostly target small businesses and the self-employed. There is no question that businesses and independent contractors should comply with current tax law, But this mission of seeking unpaid taxes includes laws to reclassify independent contractors as rank-and-file employees, making it more difficult for employers to hire them, which in turn reduces their ability to compete with larger businesses and to respond effectively to economic changes and uncertainties.”
This is unfortunate because contractors and small businesses form mutually beneficial relationships that lead to business success. Businesses benefit from the workplace flexibility, pay-for-performance billing method and reduction in fixed costs that contractors provide. Contractors seek to work for themselves because they are able to have variety in their work and schedules. Often, contractors become entrepreneurs and start their own businesses, hiring their own employees or other contractors.
Small volume home builders have long been the mainstay of the nation’s housing industry, according to a study released by the National Association of Home Builders economists. Because just over 65 percent of all home building establishments have annual receipts below $1 million, a federal push that makes independent contracting fundamentally impossible could have a significant impact on housing-related small businesses – including putting them out of business.
Next week: A look at what your National Association of Home Builders is doing to monitor and address this issue.