Worker Classification

Focus on federal and California taxes

Introduction

If an employer has the right to control the worker's work - how and what he does, the worker is an employee. If not, generally, the worker is an independent contractor. The employer's tax treatment of each is different and the workers have different tax rules that apply to them. For example, a contractor can deduct her business expenses against her business income while an employee must treat them as miscellaneous itemized deductions only deductible to the extent that category of deductions exceeds 2% of AGI.

This website, created and maintained by Professor Annette Nellen, includes links to information from the IRS and other government agencies on worker classification matters. There are also links to legislative proposals to improve the worker classification rules.

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Information from the IRS and Congress

Joint Committee on Taxation Reports

• Present Law and Background Relating to Worker Classification for Federal Tax Purposes (JCX-26-07), May 7, 2007

• Present Law and Issues Related to Classification of Workers as Employees or Independent Contractors (JCX-23-96), June 3, 1996

• Description And Analysis Of Proposals Relating To Worker Classification And The Tax Treatment Of Certain S Corporation Shareholders And Partners Scheduled for a Hearing Before the Senate Committee on Finance on May 3, 1994 (JCX-6-94), May 2, 1994

GAO Reports

• Employee Misclassification: Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention, GAO-09-717, August 10, 2009
• Employee Misclassification: Improved Outreach Could Help Ensure Proper Worker Classification, GAO-07-859T, May 8, 2007
• Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker Classification, GAO-06-656, July 11, 2006
• Issues in Classifying Workers as Employees or Independent Contractors, T-GGD-96-130, June 30, 1996
• Issues Involving Worker Classification, T-GGD-95-224, August 2, 1995
• Tax Administration: Improving Independent Contractor Compliance with Tax Laws, T-GGD-94-194 (8/4/94)
• Approaches for Improving Independent Contractor Compliance, GGD-92-108, July 23, 1992
  • Testimony
• Senate Bill 2369, Independent Contractor Tax Classification and Compliance Act of 1982, 118202, April 26, 1982

Treasury Department

• TIGTA, Employment Tax Compliance Could Be Improved With Better Coordination and Information Sharing, March 23, 2010
• TIGTA, While Actions Have Been Taken to Address Worker Misclassification, an Agency-Wide Employment Tax Program and Better Data Are Needed (2/04/2009)
• PERAB Tax Reform report includes tax gap proposal on Worker Classification – page 60

National Taxpayer Advocate Reports

• NTA 2003 page 256 - suggesting a modified withholding approach for certain contractors
• NTA 2008 page 375  - proposals for simplification

Information from the Department of Labor

• Contingent workforce
• Plan/Prevent/Protect project

Legislative Proposals and Hearings

• H.R. 6128 (111th Congress) - Fair Playing Field Act of 2010 - "to permit the Secretary of the Treasury to issue prospective guidance clarifying the employment status of individuals for purposes of employment taxes and to prevent retroactive assessments with respect to such clarifications."
• H.R. 3408 (111th Congress) - Taxpayer Responsibility, Accountability, and Consistency Act of 2009 - "to modify the rules relating to the treatment of individuals as independent contractors or employees, and for other purposes."
• Senate HELP Committee hearing on June 17, 2010 - Leveling the Playing Field: Protecting Workers and Businesses affected by Misclassification

Selected State Information

• California
  • California law including Unemployment Insurance Code - here
  • California Employment Development Department (EDD)
    • DE 44 - California Employer's Guide
    • Classification information for state agencies (also useful for other employers and has factor chart on EE v IC)
    • California Independent Contractor Reporting Requirements
    • DE 38 - Employment Determination Guide (contains a helpful set of questions)
    • EDD Precedent Tax Decisions
    • DE230 - form for worker to use to ask EDD about their classification
    • DE 1870 - form for employer to get EDD assistance in classifying worker
    • DE 573M - Independent Contractors Misconceptions Brochure
    • DE 231i - Information Sheet on classifying workers in services industries
    • DE 231TA - Employment Tax Audit Process
    • DE 40 - Tax Audit Guidelines
    • California Employer Newsletter
    • Forms, Publications and Information Sheets
  • Regulations under Title 22
    • 4304-1 - Employee Defined

    • Per DE 40 - "Title 22, California Code of Regulations, Sections 4304.2 through 4304-12, sets forth specific application of the common law rules for specific industries. These regulations must be addressed when making employee vs. independent contractor status determinations involving a type of worker or service. The following types of services are addressed:

      • Real Estate Salespeople (Title 22, CCR, Section 4304.2)

      • Home Health Care (Title 22, CCR, Section 4304.3)

      • Computer Services (Title 22, CCR, Section 4304-4)

      • Artists (Title 22, CCR, Section 4304-5)

      • Newspaper Distribution (Title 22, CCR, Section 4304-6)

      • Product Demonstrators (Title 22, CCR, Section 4304-7)

      • Security Dealers (Title 22, CCR, Section 4304-8)

      • Language Interpreters (Title 22, CCR, Section 4304-9)

      • Amateur Athletic Officials (Title 22, CCR, Section 4304-10)

      • Process Servers (Title 22, CCR, Section 4304-11)

      • Barbering and Cosmetology (Title 22, CCR, Section 4304-12)"

• Connecticut Department of Revenue
• Minnesota
  • Voluntary Compliance Initiative

Articles

• Renewed Focus on Worker Classification, AICPA Corporate Taxation Insider, 8/26/10
• Worker Classification - Is Congress Ready to Take Action? AICPA Tax Insider, 12/13/07
• Articles from Robert S. Schriebman

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