U.S. Losing Billions Over ‘Independent Contractors’

The U.S. Treasury is losing billions of dollars because employers--including the government--fail to withhold taxes from the paychecks of workers who are erroneously designated as “independent contractors,” the General Accounting Office said today.

GAO placed a good share of the blame on Congress, which, in an effort 10 years ago to curtail the Internal Revenue Service, made it more difficult to crack down on employers who violate the withholding provisions.

Paul L. Posner, a GAO associate director, told a House Government Operations subcommittee that the failure of workers designated as independent contractors to report some or all their income is at the root of the revenue loss.

In turn, GAO found, employers are not complying with requirements that they file reports with the IRS on payments made to individual contractors. Even when auditing business tax returns, the report said, the IRS is not identifying businesses that fail to file such reports.

Posner told the subcommittee on consumer affairs that in 1984 alone, the IRS estimated that it lost $1.6 billion because about one of every seven employers misidentified employees as independent contractors.

Michael J. Murphy, the acting IRS commissioner, said the agency shares concern about such non-compliance and has taken several steps to combat it. He added, “The current rules are confusing to employers and difficult for IRS to administer.”

Independent contractors are companies or individuals who supply services to a business or government agency but do not have an employee relationship with the business or agency. There are numerous tests to determine whether a worker is an employee or independent contractor, including who controls working hours.

The independent-contractor issue is not new. The IRS has been battling in the courts for years in an effort to require sellers of goods and services, such as some distributors of Amway products, to pay taxes as employees.