President Obama’s budget proposals, as well as Congressional legislation, propose to “increase certainty with respect to worker classification” by repealing Section 530 of the Revenue Act of 1978, an essential safe harbor provision that allows service providers to be classified as independent contractors rather than employees. The President even mistakenly estimates that these changes would result in an $8 billion increase in revenue over ten years.
Survey, opinion and marketing research relies upon independent contractors
Any research respondent who receives an incentive for participating in survey, opinion and marketing research is an independent contractor, not an employee of a research company.
Section 530 provides both parties to an independent contractor relationship with absolute certainty that such status will be respected by the Internal Revenue Service (IRS). As long as the income paid an individual is reported on Forms 1099-MISC, the federal government shouldn’t care whether an individual performs services as an employee or independent contractor. The FICA/SECA tax treatment of each is now substantially the same and their respective tax-compliance rates are more or less the same.
In the research profession, the certainty that Section 530 provides enables companies and respondents who receive incentives to enter into relationships that they know will be respected for federal employment-tax purposes. A certain and predictable regulatory environment for independent contractors inures to the benefit of independent contractors, the research companies that need their participation and the whole nation’s economy (which depends on that research).
MRA’s position: Congress must respect and protect independent contractor relationships by maintaining Section 530 and rejecting any proposals to weaken or delete it. Section 530 is essential to the proper functioning of the research process.
Section 530 Is Not a “Tax Loophole” and Repealing It Won’t Reduce the “Tax Gap”:
- Section 530 has rigorous eligibility requirements that are not easily satisfied.
- Rather than providing a loophole, Section 530 actually enhances tax compliance by demanding tax reporting compliance as a condition of eligibility. IRS data show a 97% compliance rate for recipients of Forms 1099, versus 99% for those of Forms W-2 and most of the “tax gap” for the self-employed comes from the unreported cash economy.
- Why penalize currently compliant taxpayers while leaving untouched the noncompliant?
- Repeal could also result in newly established companies electing to “fly under the radar” by not issuing any Forms 1099, absent any Section 530 incentive to do so.
- There is no rational basis for the President’s $8 billion figure. In fact, repealing Section 530 would likely lead to an increase in black market (unreported and untaxed) income and a significant decrease in reportable, taxable income.