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The new Senate Republican tax proposal includes a road map for how GOP lawmakers may approach an increasingly tricky issue: whether gig economy and other workers should be treated as employees or independent contractors.
The package, which the Finance Committee is marking up, would shield some employers that wrongly classify workers as independent contractors from liability under federal tax law and may take them off the hook for employment taxes. Contractors, unlike employees, aren’t subject to automatic tax withholding and are responsible for paying both the employer and employee share of Social Security and Medicare taxes. They can also write off business expenses.
The proposal is targeted at the growing gig economy, where businesses use online platforms to connect car drivers, handymen, cleaners, and other service providers with third-party customers. The rise of those online platforms has brought new attention to worker classification issues. Lawsuits challenging gig workers’ independent contractor status—which means no minimum wage and overtime pay protections, as well as exclusion from unemployment insurance and workers’ compensation protections—are currently pending in several courts.
“The proposed provisions take important steps to simplify the tax code while also promoting tax compliance among independent contractors,” Vikrum Aiyer, a policy director for online delivery service Postmates, told Bloomberg Law. “Ultimately this reflects the federal government’s leadership toward embracing the on-demand sector as an important economic force.”
A business would “generally” have to agree to pay the worker for a defined period of time or specific task and couldn’t ban the worker from providing services for other businesses to be eligible for the safe harbor, according to a document describing the chairman’s mark of the proposal. The protection from liability would also only be available in situations in which the worker invests a significant amount of money into training or assets, like a car or other equipment used to perform the job.
The measure is “so unbelievably broad, you will see lots and lots of employers re-engineering their employment relationships” to take advantage of the safe harbor, former Obama administration Labor Department official Seth Harris told Bloomberg Law. “It’s going to exclude millions of working Americans from portions of the social contract in a categorical matter.”
Sen. John Thune (R-S.D.), the Senate Republican Conference chairman, and Rep. Tom Rice (R-S.C.) earlier this year introduced standalone legislation (H.R. 4165, S. 1549)—the NEW GIG Act—that would establish the employer protections. Uber, Airbnb, TaskRabbit, Handy, and Hilton Worldwide Holdings Inc. are among the online platform companies that have lobbied in favor of that bill.
Staff for Thune and Rice didn’t immediately respond to Bloomberg Law’s request for comment. The separate tax legislation pending in the House (H.B. 1) doesn’t include a similar safe harbor provision.
Supporters of the employer protection hailed the lawmakers for trying to bring some clarity to classification. A maze of state and federal laws use different factors to determine whether workers are contractors or employees.
“The legislative language proposed by Sen. Thune and Rep. Rice—and incorporated into the Chairman’s mark—would simplify the tax code for gig economy platforms and their independent contractors,” the leaders of the Tea Party Patriots Citizens Fund, a conservative political action committee, said in a letter to Senate Finance Committee Chairman Orrin Hatch (R-Utah). “The clarity and stability that the NEW GIG Act would achieve will pay great dividends in the future of our economy.”
The proposal would require businesses to withhold 5 percent of workers’ pay for tax purposes in order to be eligible for the liability protection. It would also tweak reporting requirements for payments to independent contractors.
But the proposal seems to gloss over important factors such as who controls the work and whether the worker is economically dependent on the business, Terri Gerstein, the former Labor Bureau chief for New York State Attorney General Eric Schneiderman, told Bloomberg Law. “The key question should be is this person really running a business,” Gerstein said.
Caitlin Pearce, advocacy director for the Freelancer’s Union, declined to say whether the group supports the employer safe harbor proposal. She did say that the classification issue “cuts both ways” in that some freelancers who operate their own businesses would prefer to be treated as contractors. She added that the bill doesn’t address the elephant in the room for many of the group’s members: the self-employment tax.
“Fundamentally, it doesn’t change the biggest tax challenge for freelancers, which is that they are still paying disproportionately high income taxes,” Pearce said.
To contact the editors responsible for this story: Peggy Aulino at firstname.lastname@example.org
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