Washington has recently renewed its interest in worker classification issues, i.e. employee v. independent contractor. In September the IRS and Department of Labor signed a memorandum of understanding to share information regarding worker “misclassification.” The same month the IRS established a new voluntary classification settlement program that provides some relief from federal unemployment for eligible taxpayers who agree to prospectively treat workers as employees.

This has been a bone of contention from the IRS for decades because businesses that hire workers as independent contractors save money on federal employment taxes. There is a facts-and-circumstances based test under common law to help determine the proper classification that considers whether the employer has the right “to direct and control” how the worker performs the services provided.

Section 530 of the Revenue Act of 1978 does provide some relief from worker misclassification. As long as a taxpayer has a “reasonable basis” for treating a worker as an independent contractor, Section 530 may allow the worker to be treated as a nonemployee.

President Obama’s plan, “Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction,” released in September 2011 includes provisions that would permit the IRS to issue guidance on proper worker classification and require the prospective reclassification of workers who are currently considered misclassified, and whose reclassification would otherwise be prohibited under Section 530.

Of course all this awaits congressional action on the President’s jobs plan or perhaps a new separate bill to address worker classification issues.

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