Tax Administration

Ensuring the appropriation classification or workers for federal tax purposes--either as employees or independent contractors--have been of longstanding concern to GAO. This testimony makes four central points. First, the common law rules used by the Internal Revenue Service (IRS) for classifying workers remain as unclear and subject to conflicting interpretation as GAO found them in 1977. Second, although it recognizes this ambiguity, IRS feels responsible as the nation's tax administrator to enforce tax laws and rules. Third, in addition to classification rule clarification and compliance audit, GAO believes that two other approaches could help improve independent contractor compliance--(1) require businesses to withhold taxes from payments to independent contractors and (2) improve business compliance with the requirements to file information returns on payments to independent contractors. Fourth, aside from tax issues, changes to the classification rules must take into account the body of law that creates a safety net for American workers. Many laws apply only to employees and do not protect workers classified as independent contractors. A byproduct of classification rule clarification could be a change in the number of workers considered to be independent contractors.