Independent Contractors Seen as Heroes or Scapegoats
By KATE BERRY
Staff Reporter
An effort to wring better tax compliance out of the growing informal jobs sector has been met with backlash in the form of a bill that would call a halt to some audits conducted by the state’s Employment Development Department.
Assemblyman Mark Ridley-Thomas, D-Los Angeles, has ushered a measure through the state Assembly that would require the EDD to conduct a six-month study of the number of small businesses that classify themselves as independent contractors.
Ridley-Thomas was responding to complaints from small businesses about the audits. The EDD performed them on companies it suspected of misclassifying employees as independent contractors to avoid paying health and unemployment benefits and workers’ compensation costs.
Ridley-Thomas said the bill’s goal was to keep small businesses from being targeted. “I came to learn that thousands of small business owners are intimidated by the specter of an audit,” he said.
Independent contractors have become easy scapegoats to some and heroes of the “new” economy to others. Many economists believe increased productivity and structural changes at American corporations which now eschew hiring full-time workers and the costs associated with them have increased the number of workers classified as independent contractors.
Last month, the U.S. Taxpayer Advocate proposed in a report that taxes be withheld from independent contractors to make up for a $132 billion tax gap that the advocate claims is not being reported by the self-employed.
But the government’s monthly payroll survey does not fully capture the number of new businesses, self-employed entrepreneurs and independent contractors, resulting in significant inaccuracies in the jobs data.
“It’s clear the government does not have a good grasp on what’s really going on,” said Joseph Magaddino, an economist and director of the economic forecast at Cal State Long Beach.
Payroll report surprise
The issue of accuracy in the jobs data came to the forefront when the government released jobs data showing that a mere 1,000 jobs were created in December, not the 150,000 jobs as expected.
In California, the jobs statistics were similarly baffling. The number of corporate payroll jobs fell by 8,400 in December, even though a separate household survey found a 39,000 increase in new jobs, according to the EDD.
“The data supports the idea that people are turning to informal contracting relationships, living off the land, so-to-speak, more than ever before,” said Michael Alter, president of SurePayroll, a Chicago-based payroll processor with 10,000 small business customers, one-third of them in California.
Last year, the number of independent contractors who filed quarterly 1099 forms with SurePayroll rose by 12 percent. They now represent just under 5 percent of all filers, Alter said.
In Los Angeles, there are 1.1 million “informal” workers who make up 14 percent of the workforce, according to a report by the Anderson School at UCLA. Those workers include illegal immigrants who are paid in cash for a day’s work as well as independent contractors who work in the trades and entertainment industries.
Daniel Pink, author of “Free Agent Nation,” said government agencies are targeting independent contractors because they create problems for the tax, health and benefits systems.
“It’s symptomatic of a larger problem, which is that our policies are geared toward a way of working, full-time employment with an organization, that increasingly is less common,” he said. “But they look at anyone who works for themselves as a deviation.”
California defines an independent contractor as a sole proprietor who is paid $600 or more a year for services. But the state EDD also has a 24-point test that it uses to audit small businesses that hand out federal 1099 forms to independent contractors.
Fredericka McGee, chief consultant for Ridley-Thomas, said many one-person businesses that were working out of their homes had to go through a lengthy and expensive audit that took up to a year before being resolved.
The first draft of the bill originally included language to create a new classification of “contract service provider” that would shield such businesses. Labor leaders objected to the concept and that language was dropped from the bill.
AB 1643 would make it easier for other businesses to enter into joint ventures or contract relationships without fear of being subject to audits that would reclassify outside contractors as employees, said Cynthia McClain-Hill, president of the National Association of Women Business Owners-Los Angeles.
