Tax Treatment of Technical Service Firms Employing Certain Professionals
The Internal Revenue Code does not contain any definition or rules dealing with the issue of when a worker should be characterized for tax purposes as an employee, rather than as an independent contractor. The tax treatment depends on the application of (20) factors provided by common law, which varies by state.
Introduced by Senator Daniel Patrick Moynihan, Section 1706 added a subsection(d) to Section 530 of the Revenue Act of 1978, which removed "safe harbor" exception for independent contractor classification (which at the time avoided payroll taxes) for workers such as engineers, designers, drafters, computer professionals, and "similarly skilled" workers.
If the IRS determines that a third-party intermediary firm's worker previously treated as self-employed should have been classified as an employee, the IRS assesses substantial back taxes, penalties and interest on that third-party intermediary company, though not directly against the worker or the end client. It does not apply to individuals directly contracted to clients.
The change in the tax code was expected to offset tax revenue losses of other legislation Moynihan proposed that changed the law on foreign taxes of Americans working abroad. At least one firm simply adapted its business model to the new regulations. A 1991 Treasury Department study found that tax compliance for technology professionals was among the highest of all self-employed workers and that Section 1706 would raise no additional tax revenue and could possibly result in losses as self-employed workers did not receive as many tax-free benefits as employees.
In one report in 2010, Moynihan's initiative was labeled "a favor to IBM." A suicide note by software professional Joseph Stack, who flew his airplane into a building housing IRS offices in February 2010, blamed his problems on many factors, including the Section 1706 change in the Internal Revenue Code, though no intermediary firm is mentioned, and failure to file a return was admitted.
Read more about this topic: Tax Reform Act Of 1986
Famous quotes containing the words tax, treatment, technical, service, firms and/or employing:
“In 1845 he built himself a small framed house on the shores of Walden Pond, and lived there two years alone, a life of labor and study. This action was quite native and fit for him. No one who knew him would tax him with affectation. He was more unlike his neighbors in his thought than in his action. As soon as he had exhausted himself that advantages of his solitude, he abandoned it.”
—Ralph Waldo Emerson (1803–1882)
“Ambivalence reaches the level of schizophrenia in our treatment of violence among the young. Parents do not encourage violence, but neither do they take up arms against the industries which encourage it. Parents hide their eyes from the books and comics, slasher films, videos and lyrics which form the texture of an adolescent culture. While all successful societies have inhibited instinct, ours encourages it. Or at least we profess ourselves powerless to interfere with it.”
—C. John Sommerville (20th century)
“In middle life, the human back is spoiling for a technical knockout and will use the flimsiest excuse, even a sneeze, to fall apart.”
—E.B. (Elwyn Brooks)
“The socialism of our day has done good service in setting men to thinking how certain civilizing benefits, now only enjoyed by the opulent, can be enjoyed by all.”
—Ralph Waldo Emerson (1803–1882)
“While waiting to get married, several forms of employment were acceptable. Teaching kindergarten was for those girls who stayed in school four years. The rest were secretaries, typists, file clerks, or receptionists in insurance firms or banks, preferably those owned or run by the family, but respectable enough if the boss was an upstanding Christian member of the community.”
—Barbara Howar (b. 1934)
“All experience teaches that, whenever there is a great national establishment, employing large numbers of officials, the public must be reconciled to support many incompetent men; for such is the favoritism and nepotism always prevailing in the purlieus of these establishments, that some incompetent persons are always admitted, to the exclusion of many of the worthy.”
—Herman Melville (1819–1891)