As jobs evolve, so should tax code

Commentator Amelia Tyagi


Kai Ryssdal: Today the White House was looking ahead to what's going to be the big economic story come Friday. The July unemployment numbers. Echoing the conventional wisdom, the White House press office said it's sure several hundred thousand more jobs will be lost before the economy recovers. There are actually some worries it may be more than several hundred thousand and that what we'll have is a jobless recovery. Commentator Amelia Tyagi says a government agency we all love to hate might be a contributing factor if that does happen.

AMELIA TYAGI: The workforce is changing, probably forever. Gone is the twenty-five-year career and the predictable 9-to-5 routine. Contractors, temps, consultants, and virtual offices are as commonplace as iPhones.

We've known this for a while, but the jobless recovery may bring it into sharper focus. Business is starting to pick up, but companies are skittish about committing to long-term hires. Many are looking to contractors to fill the gap.

This is pretty much old news to everyone except the IRS.

According to the tax code, there are exactly two types of workers. Either you're an employee -- fixed at one company, working an 8-hour day, getting benefits and a regular paycheck. Or you're an independent businessperson, running your own company and setting your own hours.

Sounds simple, right? But today there are millions of people who work in the grey zones in between.

This isn't just a bit of arcane tax law. If a business mislabels an employee as a contractor when the IRS says otherwise, the business stands to bear substantial penalties.

I understand that many Americans are worried about the trend away from steady, long-term employment. But the IRS can't reverse that trend, and they may be making things worse when an already skittish company decides that they're better off not hiring any employees or contractors, or opts to use them for shorter periods -- just to "be on the safe side" with a confusing tax code.

If you think the line between contractor and employee is a clear one, guess again. Consider the computer programmer who works from home. Maybe he shifts from job to job every few months.

Suppose he takes a long weekend at the beach, and then works 15 hours the next day.

If the tax code calls him a contractor, it's no problem. But if he's an employee, he's probably due overtime pay, which can be a big problem.

It's time for the IRS to adapt the tax code to a reality we've been living with for decades. The at-home computer programmers, the consultants, the interim-execs-for-hire, and a host of other new job categories are here to stay, and they deserve a real designation in the tax code. It's time for some sensible shades of grey.

RYSSDAL: Amelia Tyagi is a co-founder of the Business Talent Group.

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Ms. Tyagi doesn't know what she's talking about. First she says the tax code is too complicated, then she says it should be made even more complicated by adding a new hybrid worker category, somewhere between an employee and an independent contractor. I guess she thinks adding more stuff to the tax code won't make it more complicated.

More importantly, she never addresses one of the prime differences between employees and independent contractors, namely, the Social Security/Medicare tax. Employers prefer independent contractors over employees, because employees are entitled to have the employer pay half of their SS tax, approximately 7.5% of their gross earnings. Independent contractors have to pay the entire tax, called the SE tax of approximately 15%, themselves. The commentator never said how exactly she'd resolve this key difference between the job categories.

Finally, she was wrong in blaming the IRS for the tax code confusion. The blame for that lies with Congresses who wrote the tax statues and the Presidents who signed them into law, not the IRS.

Consider the continuing tax situation of clergy. For income taxes clergy are employees, but for social security taxes clergy are considered self-employed.

Ms. Tiagi isn't misinformed about the confusing tax implications for businesses as the workforce changes. Many tax issues businesses face are directly related to how they classify their employees.

But as Mr. Haggerty points out, the classification the IRS uses is contained in a different law, completely outside of its purview - the Fair Labor Standards Act (which is regulated by the DOL's Wage-and-Hour Division). It's the FLSA that is still dragging around 20th-century notions of the American workforce, and the FLSA that needs changing. The FLSA controls (some say stifles) employer's ability to pay their employees in different ways, and as creative compensation is becoming more and more necessary for businesses to survive, the FLSA isn't keeping up.

Plus, changes to the Act's classification system would either automatically change the IRS's classifications, or obligate them to make the changes that Ms. Tyagi is pushing for.

In the end, though, neither agency can change the law. Only Congress can. And they should. But they won't.

All great points, but look at the number of states that are signing-on to the idea of eliminating the independent contractor. These are serious threats as well. That's why we've organized our Coalition for Independent Contractor Freedom. I invite you to check us out and add your voice-- www.cficf.org.

David Dunningan
Executive Director

You hit the nail on the head, Marian! Unfortunately the politicians will not support the FairTax fully until every individual takes a stand for it. It makes too much sense and the FairTax eliminates much of the "special interest" that politicians derive much of their power from. When are people going to wake up and take action to do what's best for this country. We've been asleep too long.

Mt Tyagi’s piece on independent contractors ignores the fundamental purposes behind all of our worker protection laws – to provide a more level playing field for the employees themselves (who are virtually always unequal at the bargaining table) but also to protect the economic system and the public as whole. She seems to say that if a company wants to flout the employment and tax laws by labeling a worker as a independent contractor or a “consultant,” that it should be allowed to do so even if it fails to meet the requirements set up to protect those very workers (because those rules should change). If this is permitted, these workers will live without the protection of every employment law on the books and companies will gain even more freedom to place any label they wish on a worker to save a few bucks. The company avoids paying the taxes that other companies are required to pay (thus gaining an unfair competitive edge and pushing up everyone else’s tax burden), and in exchange the worker has no protection from discrimination, wrongful termination, sudden lay off (no unemployment insurance), or injury on the job (no workers’ compensation), to name just a few. This means we all pay more so the employer can pay less. The employer can save some money, hire fewer workers, and shift all of its risk to its workers and the taxpayers when these workers are hurt, laid off, or the employer just decides that its little independent contractor scheme is not cheap enough and outsources its labor someplace else.

I am guessing from Ms. Tyagi’s title that she works on behalf of companies who want to reduce their labor costs. If that’s your deal, then fine, but at least be honest about all of the consequences rather and recognize that our system depends on employment laws to provide freedom from worker exploitation and ensure fair treatment of all people who toil for a paycheck.

Ms. Tyagi seems a tad confused about which agency is involved. While the IRS is concerned about the employee / independent contractor issue, the IRS concern is about collecting taxes. If an employee is treated as an independent contractor, the employer does not collect income and social security taxes and does not pay the employer's share of social security and unemployment taxes.

But the IRS does not give a hoot about overtime. That is the bailiwick of the Department of Labor - Wage and Hour Division and the wage and hour agencies of the states. And that computer programmer? If paid at least a certain hourly wage, the programmer is likely exempt from the overtime rules even if treated as an employee.

As to "...employee -- fixed at one company, working an 8-hour day, getting benefits and a regular paycheck." If it were that simple, there would not be a compliance issue.

Why would employers be skittish about hiring for the short term or on a temporary basis? Perhaps because of implied contracts and the difficulty of laying off employees. But that is labor and contract law rather than tax code and even deeper into the states' arenas.

Why do you allow folks on your show without fact-checking their claims. Ms. Tyagi obviously has no knowledge of federal overtime laws and yet she's allowed to spew out nonsense.

1. Most computer programming positions that I've ever known about would be exempt from federal overtime laws so the company would not be required to pay one thin dime of overtime pay.

2. Even if the programmer were non-exempt, the law states that a worker be paid overtime for any hours worked over 40 in a week. Working 15 hours in a day does not necessarily quality one for overtime. Many companies have policies where any hours worked exceeding 8 in a day qualify for overtime premium. However, this is merely a company policy and not the law.

Congess writes our tax codes not the IRS. They could change how employees are defined if they wanted to. The IRS only enforces the laws the way they are written and defined by the courts. The Department of Labor inforces over time rules, not the IRS.

Ms. Tyagi's story sounds as if it comes from someone who has either never worked as a "consultant" or is an owner of a company supplying temps to corporations. The portion of the tax code that Tyagi complains of may be the only thing standing between laid off Americans having an opportunity to make a decent wage and a lifetime of sweatshop employment. The IRS rules that force companies hiring "consultants" to treat them as consultants--i.e. the hiring company can't dictate hours, etc--instead of as temp slaves to be ordered around are more than reasonable. The real villans in this area of the law are the temp companies that through lobbists have written the rules that make it somehow cheaper for a company to hire a "consultant" through a temp company (and pay the 20+% commission throughout the life of the job to the temp outfit) than it is to hire the person directly. Whatever Ms. Tyagi's background, this story sounds mostly like a PR piece for temp companies wanting more power over individual contractors. NPR should provide equal time for discusssion of the economics of inserting temp outfits into the consulting employment process.


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