WASHINGTON – Congressman Tom Rice (R-S.C.) re-introduced the New Economy Works to Guarantee Independence and Growth (NEW GIG) Act, legislation that clarifies provisions in the tax code that classify workers as either independent contractors or employees. Right now, freelance-style workers are often left struggling to understand the complicated and subjective tax code as it applies to their style of work. The NEW GIG Act creates a safe harbor that allows workers to comply with a simple set of objective factors to be classified as an independent contractor, creating simplicity and continuity instead of complex rules. The bill also strengthens tax reporting requirements for independent contractors in order to reduce confusion and promote greater compliance. Senator John Thune (R-S.D.) introduced companion legislation in the Senate.
“Today’s technology driven economy has created new opportunities for people who provide on-demand services like ride sharing, home cleaning, or food delivery. Just last month, WAITR, a platform for online ordering and food delivery created 75 new jobs in the Pee Dee. These GIG economy companies and the people they employ have contributed to dynamic economic growth across the country, but face challenges regarding their worker classification with the IRS. The NEW GIG Act will clarify how these workers are treated under the tax code, providing certainty for the millions of people engaged in the on-demand community. I would like to thank Senator John Thune for his partnership on this legislation that will provide much needed certainty for GIG economy independent contractors and stimulate investment in this sector of the economy.”
The bill would create a safe harbor based on objective tests, which if satisfied, would ensure that the service provider (worker) would be treated as an independent contractor, not an employee, and the service recipient (customer) would not be treated as the employer. In the context of the gig economy where an internet platform or app facilitates the transactions and payments, that third party would also not be treated as the employer.
The safe harbor focuses on three areas that are intended to demonstrate the independence of the service provider from the service recipient and/or the payer based on objective criteria, rather than a subjective facts-and-circumstances analysis:
(1)The relationship between the parties (e.g., job-by-job arrangement, the service provider incurs his own business expenses, the service provider is not tied to a single service recipient);
(2)The location of the services or the means by which the services are provided (e.g., the service provider has his own place of business, does not work exclusively at the service provider’s location, provides his own tools and supplies); and
(3)A written contract (e.g., stating the independent-contractor relationship, acknowledging that the service provider is responsible for his own taxes, providing the service recipient’s reporting and withholding obligations).
Safe Harbor Only
Given that the safe harbor is based on objective criteria, it may not apply in every case. However, the bill would preserve the common law rules for worker classification as well as the special rules under current law that permit real estate agents and direct sellers to qualify as independent contractors.
The amount paid to the service provider under the safe-harbor would be reported to the IRS. For gig economy arrangements – three party transactions – the payer would report payments over $1,000 on IRS Form 1099-K (with the option of reporting amounts below that level). For traditional independent-contractor relationships, the service recipient would follow the existing reporting rules and file a Form 1099-MISC showing the amount paid to the service provider. The bill would update the reporting rules to require reporting of payments totaling $1,000 or more in a year, up from $600 under current law. To qualify for safe harbor, the bill would require the service recipient (or payer in the gig-economy model) to withhold a limited amount of the payments made, which would be deposited with the IRS and treated like an estimated tax payment by the service provider.
The bill addresses cases where service providers or service recipients (or payers) mistakenly believe they qualify for the safe harbor but fail to meet one or more of the requirements. As long as there is a good faith effort to comply with the requirements of the safe harbor, the bill would provide relief and only allow the IRS to reclassify the service provider as an employee and the service recipient (or payer) as the employer on a prospective basis.
Tax Court Jurisdiction
Under current law, only the service recipient may petition the tax court regarding misclassification of workers. The bill would expand current law to allow the service provider to bring such a case as well.