Independent Brokers Fear Congress May Re-Write Laws On Independent Contractors

Recently introduced legislation threatens to change the IRS rules on independent contractor worker classification and the Financial Service Group (FSI) is worried.

Recently introduced legislation threatens to change the IRS rules on independent contractor worker classification and the Financial Service Group (FSI) is worried.On July 30, in the House of Representatives, James McDermott (D-WA) reintroduced The Taxpayer Responsibility, Accountability and Consistency Act of 2008, which sought to change the tax rules relating to the treatment of individuals as independent contractors.


McDermott’s proposal would eliminate the safe harbor provision Section 530 of the Revenue Act of 1978, which allows organizations to treat a worker as an independent contractor for income tax and employment tax purposes even if a common law test classifies workers as employees. Employers only need 530 relief when the IRS determines that workers are misclassified and have issued fines to employers.

As covered in our April feature, Caught in the Crossfire, financial services professionals are worried that if the safe harbor provision which allows b/ds to classify reps as indie contractors for income tax and employment tax purposes were repealed, the independent b/d model would be opened up to IRS scrutiny not only for worker classification, but also possible back taxes, fines and court fees that could financially cripple the independent-contractor business model.Fines for an intentional misclassification can equal the total amount of federal income and employment taxes owed for the weeks or months the individual worked going back three years.

“It gives the IRS a green light to question independent b/ds on whether or not they are correctly classifying their advisors as independent contractors and that is a huge concern,” says FSI President, Dale Brown.

Currently, Brown says the issue is one of the group’s highest priorities. In May, ten members of FSI’s Financial Advisor Council, as well as FSI Board Chair Eric Schwartz and Vice Chair Mari Buechner, met with thirteen key representatives and senators to voice their opposition to potential changes to worker classification/independent contractor rules. If legislation is passed, Brown says the independent b/d advocates would like to see a carve out for the financial services industry.

FSI is also worried that when the 111th Congress reconvenes on September 8, a similar bill will be reintroduced by Congressman Rob Andrews (D-N.J.) which would restrict employers' ability to classify workers as independent contractors. In April, Andrews confirmed his intent to re-introduce the legislation in the 111th Congress this year, with the potential support of President Obama, who co-sponsored a similar bill in 2007 when he was a U.S. senator.

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