The Financial Services Institute (FSI) plans on lobbying against recently re-introduced legislation in the Senate that threatens financial advisors’ “independent contractor” worker classification. On December 15, Senator John Kerry (D-Mass.) introduced the “Taxpayer Responsibility, Accountability and Consistency Act of 2009,” which would change tax rules regarding the classification of independent contractors.
Generally, the bill, which has been hanging around since 2008, is seen as making it harder for employers to classify workers as independent contractors. The FSI and independent broker/dealers fear this bill, because, if it became law, it might scuttle the independent-contractor financial advisor business model. Will it become law? That’s anyone’s guess, but FSI and IBDs will be watching this issue carefully in 2010. After all, President Obama and the Democratic-controlled Congress are among the most liberal ever.
Similar to the House bill introduced by Rep. Jim McDermott (D-Wash.) on July 30 (H.R. 3408), the Senate bill’s core provisions make it more difficult for employers to classify workers as independent contractors and more costly for the misclassification of workers.
In the fall, FSI President Dale Brown said the group had discussions with Rep. McDermott, who agreed to work with the group to find a solution to the bill’s unintended consequences for independent financial advisors affiliated with independent broker/dealers. When Congress reconvenes in January, Brown says FSI will engage Sen. Kerry’s staff and members in the Senate Finance Committee in similar conversations.
FSI says it fears the Senate and the House bill would give the IRS reason to question the independent-contractor status of independent financial advisors affiliated with IBDs. Furthermore, independent b/ds fear 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.
Among other things, the proposed legislation 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.
“The ideal scenario is that whatever is finally passed makes it very clear that independent b/ds are not the target because we are not the problem they (Congress) are trying to address,” says Brown.
So far, legislation in the House and Senate aiming to change tax rules regarding worker classification has failed to become law, but the recently introduced legislation could gain the support of President Obama, who co-sponsored a similar bill in 2007 when he was a U.S. senator.