Carol Roth: IRS Must Change Rules for Freelancers, Small Business

woman at laptopFrom NewsMax, Carol Roth argues that the IRS must change the rules for classifying workers as employees or independent contractors.  She contends that permitting individuals to work as independent contractors will be good for business and would increase tax revenues.  She writes:

“Entrepreneurship in the United States has undergone a fundamental shift. Services have replaced manufacturing as our primary growth driver.

On one hand, this has created a skills gap for many in the workforce. On the other hand, it has also created new self-employment opportunities, particularly through freelancing.

If you are a freelancer, or utilize freelancers in your small business, you know that freelancing gives individuals an opportunity to take more control of their own professional destiny and is often a first step in establishing a business that grows and employs others.

Small business growth is the pre-eminent growth catalyst for the U.S. economy. There are approximately 28 million business owners in the U.S. alone, including many solo business owners.

In cities like Chicago, small businesses employ half of the workforce. This means that we should be highly focused on creating a favorable business environment where small businesses can grow and thrive. However, the U.S. tax code hasn’t kept up with the changes in the business environment and the needs of small business owners like us.

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One simple definitional change in the tax code — revising the definition of an independent contractor, aka a 1099 worker — would provide substantial support to help foster a pro-small business environment.

If you are confused by the difference between a 1099 worker/independent contractor and an employee, you are not alone.

Per the IRS, “Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.”

This may seem like a small distinction, but to small business owners who are already consumed with burdensome administrative tasks, not to mention a cost structure that may not be yet scalable, it is a significant one.

Small businesses make extensive use of independent contractors and freelancers as a way to fill in gaps in their business.

However, the IRS says that if you perform work that would be done in the normal course of business by an employee (including, amongst other things, not setting your own hours or methodology for completing the work), you are considered an employee, not an independent contractor, for tax purposes.

This stands even if you own your own firm, have additional clients and/or just plain want to be one.

It is very clear that this outdated definition creates a barrier to hiring for small business owners. It means that a freelancer may be considered an employee by IRS standards, creating additional paperwork and compliance for a small business owner.

This outdated rule affects small business owners on both sides — impeding the hiring company from growth and the freelancer from getting more work….”

Read the full story at Carol Roth: IRS Must Change Rules for Freelancers, Small Business.

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