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By David McAfee
Jan. 30 — The emergence of the “gig economy,” which involves on-demand workers and app-based employers such as Uber Technologies Inc. and Lyft Inc., continues to spur questions about employer-employee relationships that probably won’t be answered by the IRS.
Janine Cook, deputy associate chief counsel in the Internal Revenue Service Office of Chief Counsel, said the U.S. Tax Court usually looks at seven factors to determine whether a worker is an employee or a contractor. It will be interesting to see how that standard plays out, she said, as more and more companies are changing traditional roles and blurring the line between the two classifications.
“Will that test work in the on-demand economy?” Cook asked Jan. 29 at the American Bar Association tax section midyear conference in Los Angeles. “Let’s say nothing changes. As I said, we can’t change the standard, we can’t do guidance, we can’t even talk about, formally, how you apply it in this context in light of the prohibition.”
Cook explained that tax code Section 530 prohibits the IRS from issuing guidance on worker classification and, more specifically, the common law test. The common law test states that an employer-employee relationship exists if the business has the right to direct and control the worker who performs the services.
Cook said the IRS recognizes that it's dealing with new or changing work relationships and dynamics, but can't issue formal guidance on the matter covering most workers. However, Section 530 doesn’t apply to a certain segment of workers, including technology workers and engineers, according to the government.
“So in 1985, notwithstanding that guidance thing, we ended up doing a Rev. Proc.—I think it was 85-18—which ended up walking through some issues because we did it in the context of the people who weren’t subject to 530,” Cook told Bloomberg BNA in a Jan. 29 interview. “But generally speaking, we just can’t.”
Cook said the administration has asked Congress in its budget proposals for several years to put the provisions in the Internal Revenue Code and get rid of the prohibition.
“And I think there’s been some bills proposed to do it, but nothing that’s happened,” she said.
Cook also noted that employers with classification problems can self-correct using Section 3509.
“So when you run across clients who realize they have a misclassification problem, they can use the 941-X to correct that and use the 3509 rates assuming they’re not going to own up to it being intentional disregard,” Cook said. “So I think that’s a positive thing.”
Cook said employers may be daunted when they realize they have a misclassification, anticipating “astronomical liabilities.” They need to realize that 3509 is a mandatory rule, she said.
“It’s not an optional thing,” Cook said. “We clarified instructions a few years ago that 3509 can be self-applied, if you will, in a correction process.”
Cook also drew attention to the IRS’s Voluntary Classification Settlement Program (VCSP), which she said has been out for a few years.
“You pay, I think it ends up being like 1 percent of their wages in taxes, based on one year, so it’s CSP plus plus,” Cook told conference attendees. “It’s a much-reduced tax payment—or payment in lieu of tax I think is the way it’s phrased in the announcement—as a process of getting it right going forward and getting protection for the past.”
Cook said the IRS is most interested in getting the compliance going forward and that, as a part of the VCSP, the employer admits no wrongdoing for past conduct.
“I think VSP has been pretty successful and the Service is eager for people to continue,” Cook said. “There’s criteria and all that, which you’d have to look at, but Form 8952 is the way to go.”
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