Compliance Problems of Independent Contractors

The compliance problems of independent contractors are a part of the overall compliance problem of self-employed taxpayers. The generally accepted common law definition of "independent contractor" is a person engaging the services of another who has "the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which the result is to be accomplished." The ambiguity of this definition has caused controversy between taxpayers and the Internal Revenue Service (IRS) as to the correct tax classification of workers. While limited studies have been done, a more complete study of compliance among independent contractors would provide a better basis for assessing the type of legislative changes needed. However, an IRS audit showed that the overall compliance level of business taxpayers was less than that of nonbusiness taxpayers. Also, GAO statistics show that in 1972 there were relatively more self-employed people in the nonfiler population than in the filing population. Since the total universe of independent contractors is unknown, it is not possible to draw a representative sample of all independent contractors. However, the samples that have been used appear reasonable and provide a sufficient basis for making the policy judgment that compliance among independent contractors and self-employed individuals is serious enough to warrant use of withholding to collect part of the taxes owed by this group of workers. It is also important for the tax laws to be clear, unambiguous, and not subject to arbitrary interpretation.