Worker classification - Does Section 530 apply to the states?

IRS Publication 1976.

I'm pleased to offer a guest post today - from Dr. David Jenkins. He writes about a longstanding issue that Congress has let linger even though it is of growing importance. The broad issue is how to classify workers as either employees or independent contractors. The issue Dr. Jenkins addresses within this topic is "Section 530" that was part of the Revenue Act of 1978. Basically, Section 530 allows employers to misclassify workers if they meet a specified safe harbor. It also prohibits the IRS from issuing guidance on worker classification.  Section 530 adds some complexity, including how it applies to workers, state governments and outside of the employment tax arena.

Dr. Jenkins lays out an argument for Section 530 applying to states and also to the Affordable Care Act. Here is his summary of a longer paper (see link  to full paper at end).

Why Section 530 of the Revenue Act of 1978 Applies to the States

By David Randall Jenkins, Ph.D.*

Section 530 of the Revenue Act of 1978 may already apply to the states, the Affordable Care Act, and title 29 issues.  Don’t be surprised if state unemployment agencies and DOL are rabid in pursuing misclassification issues in your business or your clients’ businesses.  But don’t give up the section 530 issue when those agencies claim it is limited to subtitle C employment taxes.

The Department of Labor and the Internal Revenue Service entered into a Memorandum of Understanding (MOU) on September 19, 2011.  The next day, six states joined the MOU melee.  Now, a few years later, the tale of the tape is in. 

The Obama administration undertook a strategy to attack Section 530 of Revenue Act of 1978 by and through state unemployment agencies and a DOL attack which the executive branch ostensibly contends lies outside subtitle C.  The President’s section 530 animus can be traced back to his days in the senate, by and through failed legislation he proposed shortly before he occupied the White House.  The administration’s transparent goal is to reign in independent contractors to be covered as employees for Affordable Care Act purposes.

The Supreme Court’s Rowan decision may stand for the proposition Congress contextually qualified the subtitle C definition of employment and employee when it enacted section 530.  Because the independent contractor safe harbor provision is not part of the Internal Revenue Code, per se, it may also be held to contextually qualify similar definitions in U. S. Code provisions other than those contained in Title 26.  Moreover, longstanding dual federal-state taxing jurisprudence implicates contextually qualified subtitle C definitions extend to the states to ensure coterminous, uniform, and harmonious state enactments.  For these reasons, the federal employment tax safe haven already applies to the states.

It is interesting to note there are conflicts among the states in recognizing the safe harbor provision’s applicability to state employment acts.  For example, Indiana respects the coterminous, uniform, and harmonious requirement while Missouri does not.  However, H.R. 1642 has been passed by the Missouri house and is dawdling before the Missouri senate.  The provision will extend IRS section 530 determinations to matters before the Missouri employment agency.

It appears the Obama administration’s interference in the section 530 Congressional will to contextually qualify the unemployment tax definitional infrastructure implicates separated powers substantive due process.  The caldron is currently boiling.  Federal intervention looms on the horizon. 

My paper, “Why Section 530 of the Revenue Act of 1978 Applies to the States,” is available on my website at:  http://www.algorithm-llc.com/research-corner/ (scroll down near the bottom of that webpage).

 

*Dr. Jenkins has a Doctor of Philosophy in financial accounting and a Masters in Accounting with an emphasis in tax from the University of Arizona.  He has taught tax courses at both the graduate and undergraduate level.  He currently provides tax and business consulting services through his company, Algorithm LLC (algorithm-llc.com).

 

What do you think?