lmg@sfmin.UUCP (10/25/86)
The Congress has apparently left a bombshell hidden in the new Tax Reform legislation, which was recently signed into law. The amendment to the tax law EFFECTIVELY ELIMINATES THE SUBCONTRACTOR RELATIONSHIP under which many of us do business. At least that is the interpretation given it by my contracting firm. They are planning on reclassifying all independent subcontractors as employees and deducting employment taxes beginning 1/1/87. The amendment affects only those in the "technical services" industry, i.e., programmers, engineers, etc. In other words, if you are a subcontractor and are reading this, the congress may have just taken away your business. I have attached the full text as I received it yesterday. If this affects you I strongly suggest you review it, have your lawyer review it, and plan action. I am told by my contractor that the bill is "under review for 'Technical Corrections and Considerations'", so there may still be time to overturn this, though I personally don't see how, since the bill is now law. In any case my lawyer is looking at it, and I intend to contact my Representative and Senators as soon as possible. And since this provision seems to be completely unknown, I'm spreading the word. I would like to hear from anyone who can shed any light on this issue, particularly those with legal knowledge, and specifically on ways to overturn it or avoid it. The interpretation I have been given may not be correct, but if it is the effect on existing businesses can be catastrophic. Larry Geary AT&T-IS Summit, NJ ihnp4!attunix!lmg ======================================================================== Excerpt from Draft Conference Agreement of the new Tax Reform Bill Pages II-834 and II-835 ============================================================================ 5. Treatment of certain technical personnel Present Law Section 530 of the Revenue Act of 1978, as amended, provides generally that taxpayers who in the past had a reasonable basis (such as past industry practice) for not treating workers as employees may continue such treatment, under certain circumstances, without incurring employment tax liabilities. House Bill No provision. Senate Amendment The Senate amendment provides that section 530 of the Revenue Act of 1978 does not apply in the case of an individual who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. This provision is effective for services performed after the date of enactment. By virtue of the exception to section 530 of the 1978 Act provided under the Senate amendment, the prohibition against issuance of regulations or rulings concerning employment tax status in section 530 of the 1978 Act does not prohibit issuance of regulations or rulings with respect to the employment tax status of individuals with respect to whom the Senate amendment applies. Under the Senate amendment, it is intended that certain individuals retained by firms providing technical services are classified, for income and employment tax purposes, as employees or as independent contractors under the generally applicable common law (nonstatutory) standards without regard to section 530 of the Revenue Act of 1987. Technical service firms have retained engineers, designers, drafters, computer programmers, systems analysts, and other similarly skilled personnel who are engaged in lines of work similar to those listed for assignments for clients of the technical services firms. Some of these individuals have taken the position that they should be treated as independent contractors, which would relieve the technical services firms of the obligation to withhold income and employment taxes from their earnings. The Senate amendment applies whether the services of such individuals are provided by the firm to only one client during the year or to more than one client, and whether or not such individuals have been designated or treated by the technical services firm as independent contractors, sole proprietors, partners, or employees of a personal service corporation controlled by such individual. The effect of the provision cannot be avoided by claims that the technical service personnel are employees of personal service corporations controlled by such personnel. For example, an engineer retained by a technical services firm to provide services to a manufacturer cannot avoid the effect of this provision by organizing a corporation that he or she controls and then claiming to provide services as an employee of that corporation. This provision does not affect the application of Code section 414(n), relating to employee leasing, to technical services personnel in circumstances where that provision applies under present law. Also, the provision does not apply with respect to individuals who are classified, under the generally applicable common law standards, as employees of a business that is a client of the technical services firm. Conference Agreement The conference agreement follows the Senate amendment with a technical modification clarifying the language of the Senate amendment to conform to the language of section 530 of the Revenue Act of 1978 and with an amendment to the effective date. The conferees further clarify that the provision does not affect the application of the Treasury's authority under Code 414(o) to prevent avoidance of certain employee benefit requirements. The conferees believe that the provision will provide more consistent tax treatment of individuals performing services in the technical service industry. The conference agreement is effective for remuneration paid and services performed after December 31, 1986. ============================================================================
abc@BRL.ARPA (Brint Cooper) (10/26/86)
The portion of law that you attached to your note seems to apply
only to individuals whose services are solicited and contracted for by a
third party, a "technical services firm."
It appears not to conver the case where the individual is a
consultant and contracts with the using company directly, without the
aid of a third party "broker."
Is that how you see it? Could you not preserve your
subcontracting status by doing your own advertising and marketing and
contracting directly with the using firm?
Brint Cooper
ARPA: abc@brl.arpa
UUCP: ...{seismo,unc,decvax,cbosgd}!brl-smoke!abc