On March 7, 2019, Senator John Thune (R-SD) reintroduced legislation aimed at simplifying worker classification and requiring additional wage reporting under certain circumstances.  Senator Thune introduced the New Economy Works to Guarantee Independence and Growth Act (the “New GIG Act”) for the first time in 2017.  It was included in the chairman’s mark of the Tax Cuts and Jobs Act, but was ultimately removed because the bill was passed using the reconciliation procedure.  Rep. Tom Rice (R-SC) introduced the bill in the House.

Worker classification has long created headaches for service recipients, who may be unsure if they are required to withhold taxes from payments owed to service providers.  Under the Code and regulations, a service recipient’s withholding obligations depend on a common law worker classification test, which is often difficult to apply to gig economy service relationships.

The Act aims to address the lack of clarity as to wage withholding by creating a safe harbor for the classification of specified gig-economy employment relationships.  If a given service satisfies certain criteria, the service provider shall not be treated as an employee, the service recipient and the payor shall not be treated as employers, and “the compensation paid or received for such service shall not be treated as paid or received with respect to employment.”

The safe harbor will apply if the service provider satisfies the following three sets of criteria:

  • The first and most detailed set of criteria is titled “General Service Provider Requirements.” A service provider satisfies these requirements by (1) incurring expenses that are deductible under section 162, a significant portion of which are not reimbursed; (2) “agree[ing] to perform the service for a particular amount of time, to achieve a specific result, or to complete a specific task” (i.e. is not indefinite); and (3) satisfies at least one of four other criteria, which relate to other familiar worker classification criteria such as whether the worker has a significant investment in assets or training that are applicable to the service performed, is required to provide services exclusively to the service recipient or payor, has been treated as an employee of the service recipient or payor during the year prior to entering into the contract, or is compensated on an hourly basis.
  • The second set of criteria is generally satisfied if the service provider has her own principal place of business does not provide services primarily at the service recipient’s place of business, pays a market-value rent in exchange for use of the service recipient’s place of business, or provides the service primarily using her own equipment.
  • The final set of criteria relates to the terms of the written contract between the service provider and the service recipient or payor, requiring that (1) the contract includes certain provisions, including that the service provider will not be treated as an employee and is responsible for payment of applicable taxes on compensation under the contract and that the service recipient or payor will withhold upon and report to the IRS the compensation payable under the contract as required by law; (2) the term of the contract is limited to two years; and (3) is signed by both parties before the aggregate payments made by the payor to the service provider exceed $1,000.

The bill would also:

  • Increase the reporting threshold under sections 6041 and 6041A from $600 to $1,000.
  • Change the threshold applicable to third party network transactions under section 6050W from $20,000 and 200 transactions to $5,000 and 50 transactions in the case of payments by “marketplace platforms” to sellers primarily of goods and $1,000 for other third party network transactions.
  • Create a withholding regime for payments made pursuant to contracts intended to be covered by the new safe harbor, including applicable reporting of any withheld taxes.

If this bill is passed, the safe harbor could allow businesses to significantly simplify the worker classification process for wage withholding purposes.  Although the bill is ostensibly targeted at the gig economy, the bill would likely simplify this determination for many other independent contract work relationships and update the dated thresholds for reporting.  Given the split in control between the two houses, the NEW GIG Act is unlikely to pass unless it can garner bipartisan support.  As of today, the bill has garnered no cosponsors in either the House or Senate.

Photo of Michael M. Lloyd Michael M. Lloyd

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits…

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits, cross-border compensation, domestic information reporting (e.g., Forms W-2, 1099, 1095 series returns), penalty abatement, and general tax planning and controversy matters. Mr. Lloyd advises large U.S. and foreign multinationals regarding compliance with information reporting and withholding issues, as well as a range of other federal and state tax issues.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.