Moving Words – Independent or Not?

Timothy Brady

“True independence and freedom can only exist in doing what’s right.” – Brigham Young

On March 10, 2024, the U.S. Department of Labor (DOL) will be implementing their final rule replacing the Trump era independent contractor rule (2021IC Rule) with RIN 1235-AA43 Employee or Independent Contractor Classification Under the Fair Labor Standards Act. This new rule sets up six economic reality factors to decide employee/independent contractor status. These use some of the same guidelines as the Internal Revenue Service has for determining whether a worker is an independent contractor or an employee. The DOL factors add some new ones while going into more detail on existing ones. It’s suggested that movers, van lines and their agents refamiliarize themselves with the IRS Independent Contractor rules and learn the details to the new DOL Independent Contractor rules. This article will focus on the IRS rules. To study the details of the new DOL Independent Contractor rule, go to the article titled Moving Words – IC Final Rule in the MoversSuite Blog.

Let’s first begin by understanding the Internal Revenue Service definition of someone who is an Independent Contractor (IC).

The IRS uses three characteristics to determine the relationship between businesses and workers:

Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.

Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

1. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
2. If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.

This sounds cut and dried, but as we all know, anything with the government isn’t that easy. There’s Section 530, exemption for certain businesses, which allows them to classify certain workers as an Independent Contractor. One of those industries is over the road (OTR) trucking, hence the existence of lease operators and lease purchase programs.

Section 530 relief requirements: To receive relief, you must meet all three of the following requirements:

1. Reasonable Basis First, you had a reasonable basis for not treating the workers as employees. To establish that you had a reasonable basis for not treating the workers as employees, you can show:
   1. You relied on a court case about Federal taxes, or a ruling issued to you by the IRS.
   2. Your business was audited by the IRS at a time when you treated similar workers as independent contractors, and the IRS did not reclassify those workers as employees.
   3. You may not rely on an audit commenced after December 31,1996, unless such audit included an examination for employment tax purposes of whether the individual involved (or any other individual holding a substantially similar position) should be treated as your employee;
   4. You treated the workers as independent contractors because you knew that was how a significant segment of your industry treated similar workers;
   5. Or you relied on some other reasonable basis. For example, you relied on the advice of a business lawyer or accountant who knew the facts about your business.
   6. If you did not have a reasonable basis for treating the workers as independent contractors, you do not meet the relief requirements.
2. Substantive Consistency In addition, you (and any predecessor business) must have treated the workers, and any similar workers, as independent contractors.
   1. If you treated similar workers as employees, this relief provision is not available.
3. Reporting Consistency Finally, you must have filed all required federal tax returns (including information returns) consistent with your treatment of each worker as not being employees.

    

   This means, for example, that if you treated a worker as an independent contractor and paid him or her $600 or more, you must have filed Form 1099-MISC for the worker. Relief is not available for any year and for any workers for whom you did not file the required information returns.

For further information, see Publication 1976, Do You Qualify for Relief Under Section 530? https://www.irs.gov/pub/irs-pdf/p1976.pdf

What are the benefits to an individual by becoming an Independent Contractor (IC)?

• He’s his own boss.
• No federal or state tax is withheld from her pay.
• He can take increased business deductions.
• She sets her own work hours.

What are the disadvantages?

• As an IC, he might not be paid. He must file a suit or hire a collection agency.
• She must pay self-employment taxes. (Twice what she would pay in FICA taxes as an employee.)
• He must track all expenses and income to determine his tax liability. He is responsible for all business and personal taxes.
• She may be personally liable for business debts.
• He has no employer-provided benefits.
• She has no unemployment insurance benefits.
• He has no employer-provided workers’ compensation.
• She has fewer labor law protections.

What are the benefits to your business or company for contracting with an IC?

• Your company doesn’t incur any employee expenses like FICA, unemployment tax, workers’ compensation insurance or other employee benefits an employer would pay.
• The IC has little or no protection under labor laws.
• Better cash flow control; your company only pays them when they’re needed. With this flexibility to the changing work demands of your company, you can take advantage of opportunities as they arise, and you have greater cost control during slow periods.
• The ICs must provide their own tools, transportation and pay their own expenses.
• For any business or company, there is no minimum or maximum required to pay an IC.

What are the disadvantages of using an IC in your business?

• Lack of Control: ICs by law must decide their work schedules. All your business or company can do is require them to complete the job by a certain time.
• No Fixed Rates: Your small business may find the perfect IC to work with, but the rates charged can vary by project and overall market demand. With an employee, you can usually set the pay rate until the next review date.
• Misclassification Penalty: If you make a mistake in classifying an employee as an IC, you are liable for employment tax and interest, plus a penalty. Use caution in classifying workers, or it can become very costly to your business.

Many motor carriers use ICs as ‘lease operators’. The trucking industry has established itself with the IRS for Relief under Section 530, so not all IC requirements need to be met for a trucker to qualify as an Independent Contractor. But it’s wise not to assume that a trucker is automatically an IC. It’s always best to have your IC program reviewed by a tax attorney, CPA, or Enrolled Agent familiar with the Independent Contractor portion of the tax code, along with the Section 530 Relief guidelines and how it relates to the entire trucking industry.

For further detailed information, see  Publication 1779, Independent Contractor or Employee https://www.irs.gov/pub/irs-pdf/p1779.pdf

 “There’s no such thing as an independent person.” – Peter Jennings