Enacted in 1978, §530 is a safe harbor law that lists several conditions which if met allows workers to be treated as independent contractors rather than employees.
Joe Stack was compelled to burn his house down murder with his wife and children in it and fly his plane into the side of a federal building because 24 years ago Congress passed and President Reagan signed into law the Tax Reform Act of 1986 that added sub-section (d) to §530 thereby excluding engineers and computer programmers from the safe harbor provisions of §530 .
The passage of this law (§1706 of the Tax Reform Act of 1986) did not as some have suggested make all engineers and computer programmers employees, it merely made them subject to the 20 factor common law test historically used for determination of a worker’s status. In other words, had Joe Stack been truly independent from the company or companies to whom he provided services, he could have, should have and would have been treated as an independent contractor rather than an employee.
In any case, the treatment of workers as independent contractors rather than employees has always been more advantageous to employers than it has been to their workers.
Workers generally prefer to be treated as employees¹ for the following reasons:
- The employer must pay from its own funds the matching portion of the employee’s FICA and medicaid tax (7.65% of gross wages).
- The employer withholds and remits income taxes from the worker’s pay thereby obviating the worker’s obligation to make estimated tax payments.
- The employer must carry worker’s compensation insurance on the employee.
- The employee’s negligent acts are covered under the employer’s general liability umbrella.
- The employer can make an unemployment insurance claim if his employment is terminated.²
- The employee is eligible for employer provided fringe benefits such as health insurance, vacation pay, etc.
And employers, of course, prefer independent contractors to employees because it reduces their costs of labor.
Independent contractor status does, however, carry with it at least one legitimate advantage for the worker:
- There is no limit on the amount of unreimbursed business expenses an independent contractor may claim whereas an employee’s business expenses are subject to a 2% floor and the worker must itemize deductions in order to claim them
But somehow I don’t think it was the 2% floor that was on Joe Stack’s mind when he flew his plane into that Austin federal building.
Instead, Stack was upset that §1706 did precisely what it was designed to do: Deprive him of the chance to exploit independent contractor status to avoid paying taxes through non-filing or through the understatement of income, overstatement of deductions, and avoidance of income tax withholding.
In spite of the overwhelming advantages attendant to employee status, Joe Stack desperately wanted to be treated as an independent contractor for one simple reason: It would have made his tax protesting easier.4
Footnotes:
¹ We have met many taxpayers who worked as independent contractors for years without so much as a peep of protest until they realized, ex post facto, that it might have better for them to have been treated as employees. In our experience, workers tend to be content with their independent contractor status until one of the following happens:
- They get fired or quit
- They get hurt on the job
- They get sued for something they did while on the job
- They need a bank loan (and employment verification)
² If Stack had been an independent contractor and was subsequently “fired” by his principal, my hunch is it would have taken him less time to file a claim for unemployment compensation than it takes Apolo Ohno to finish short track.
³ Indeed, §1706 was included in TRA ’86 because the CBO had estimated that the government was losing up to 30% of taxes because independent contractors were either not reporting all of their income on their tax returns or were claiming fraudulent or questionable deductions against that income.
4 Like all tax protestors, Stack knew that once the IRS had collected his taxes through payroll withholding it would never give it back to him based on previously refuted tax protestor arguments. Consequently, his only chance of avoiding taxes was to control his own tax payments and then use his frivolous arguments to evade or at least defer paying taxes.
13 responses so far ↓
1 Austin Joe, tax protests, and independent contractor vs employee status « Growing Without Rain // Feb 21, 2010 at 2:30 pm
[...] Tax Lawyer, Peter Pappas, has this explanation of the independent contractor vs employee ruling that was at the heart of Stack’s decision to [...]
2 Ian // Feb 21, 2010 at 8:03 pm
Good explanation
3 Peter // Feb 21, 2010 at 8:17 pm
Ian,
Thank you.
4 Publius Novus // Feb 22, 2010 at 12:17 pm
Thank you. You cleared up the media-abetted mess quite nicely.
5 Justice Server // Feb 22, 2010 at 4:43 pm
Can you please explain where you get the idea that Mr. Stack murdered his wife and family? If you cannot, I suggest you correct your blatant error before you get sued for defamation.
6 Don Kealey // Feb 22, 2010 at 4:47 pm
I also would like to know where you got the impression that Joe Stack murdered his family. Please provide references for this, thanks!
7 Justice Server // Feb 22, 2010 at 4:55 pm
Are you stating that Joe Stack was compelled to burn down his house (FACT: which he did), MURDER his wife and children (which he did or did not do (please clarify)), and fly his airplane into the side of a federal building (FACT: which he did).
8 Peter // Feb 22, 2010 at 4:58 pm
Justice and Don,
Wow, you’re right. I did say he murdered his wife and children.
I corrected it. I meant to say attempted to murder them by setting fire to his house with them inside of it.
My bad.
9 Justice Server // Feb 22, 2010 at 4:59 pm
Coolz.
10 Jay Darby // Feb 23, 2010 at 12:48 am
I do not condone or approve of any thing Stack did, and assume he was mentally ill in a serious way. His suicide note, which has somehow been turned into an instant political manifesto, is garbled nonsense, oddly enough more left than right (odd, at least, for the garden variety tax protester), but not politically consistent on either end of the political spectrum and in that respect similar to the garbled philosophies of other notably sinister kooks like Charles Manson.
What I do want to address are several observations in this blog about employer v. independent contactor status with which I respectfully disagree. In my experience most skilled service providers would prefer independent contractor status to employment status. (1) Independent contractors can deduct all commuting expenses to and from a work site, which employees cannot; (2) independent contractors can deduct home office expenses, including depreciating a significant portion of the home, can deduct the cost of their tools, and can generally justify deducting a variety of other expenses that are deductible in full as an independent contractor, and which would be either non-deductible expenses of an employee or else unreimbursed employer business expenses subject to the 2 percent floor; (3) independent contractors can create their own qualified retirement plans instead of being forced into whatever plan (if any) is offered by the employer. The result of the foregoing tax benefits is that independent contractors will generally pay materially less tax on the same economic income than an employee receiving the “same” economic wages.
On the employer side, no competent employer “forgets” that it has to pay all the costs described above — e.g., the 7.65 percent employer’s share of FICA, the cost of unemployment insurance, the costs of fringe benefits, the costs of worker’s compensation. A business will pay an independent contractor a “premium” of about 40 to 50 percent about “wage” level to account for this differential. I have even represented companies who (not exactly properly) offered workers a choice of employment or independent contractor status, and gave the ICs 40% more pay. It was a true measure of the “indifference curve” for that company — the payment costs were equivalent, and it was up to the worker to choose his preferred relationship.
My personal belief is that the American market for labor would be much improved and far more flexible and dynamic if independent contractor relationships were in fact encouraged rather than discouraged by federal and state tax laws (not to mention wage and hour laws). The more capable and talented the American labor pool becomes, the more we benefit collectively from flexible contracting relationships rather than adhering to rigid 1930s style employer-employee labor relationships. Indeed, employers in the current recession who are reluctant to hire “employees” precisely because of the costs described in this article might be far more willing to risk an independent contract relationship if they knew they could later terminate that relationship easily without unemployment costs and other costs ultimately borne by the employer for a “bad” employment decision.
Again, this is not to defend Stark in any way, but rather to point out that the IRS is about to embark on a huge enforcement program (proposing to audit 6000 business over the next few years) in order to “enforce” employee status and catch employers who are allegedly improperly using independent contractor status. If the goverment’s goal is to further discourage the hiring of workers, then this is an excellent policy. If, however, the government is actually trying to encourage jobs, as it claims, then perhaps it should make the costs of employment less onerous, and one of the best ways to accomplish that specific objective would be to embrace and expand the permitted use of independent contractor relationships throughout the US economy. I am in favor of providing the maximum possible flexibility in structuring work relationships: I think workers should be both encouraged and allowed to work, and that the current government obsession with forcing “employment” status on work relationships is counterproductive.
11 Peter // Feb 23, 2010 at 8:50 am
Jay,
Thank you for your very excellent comments.
There is a reason employers generally want their workers to be independent contractors rather than employees. It reduces their job costs.
Every deduction available to an independent contractor is also available to an employee. The only difference is that the employee must take his business expenses on Schedule A which subjects them to a 2% floor. And reputable employers generally reimburse their employees for their business expenses.
I’ve been doing this for 25 years and have never seen a business give a 40% premium to an independent contractor. But even if that number is accurate, it merely confirms my point that employers prefer their workers to be independent contractors because it costs them less money. The inverse of this is that the total compensation package (including FICA matching, vacation pay, sick pay, workers compensation and other fringe benefits) paid to employees exceeds the compensation paid to non-employees.
This is why most honest workers who intend to comply with the law prefer employee status. I admit that workers like Stack who have no intention of paying their taxes or plan to overstate their deductions, greatly prefer independent contractor status.
I estimate that a solid 80% of the non-compliant taxpayers who have hired my firm in the last 20 years have been self-employed individuals. The self-employed regularly fail to make their estimated tax payments, serially underreport their income and habitually overstate their deductions. I am no defender of the IRS, but the reason it wants more workers to be employees is because there is a direct relationship between the number of independent contractor taxpayers and the size of the tax gap.
12 Wes Masters // Feb 23, 2010 at 12:20 pm
Great explanation. I hadn’t heard much about this since it happened. The whole thing is just incredibly sad and mind-boggling at the same time. I work with the great people at the Austin IRS branch every year. The whole thing just makes zero sense.
13 Deconstructing a Tax Wacko // Feb 25, 2010 at 10:49 am
[...] ← Tax Bomber Stack Wanted Independent Contractor Status to Avoid Paying Taxes Bipartisan Tax Reform Proposal [...]
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