Changing ways of working call for changing employment and tax policy

The way individuals work for pay has transformed radically in recent years, but employment practices and tax treatment remain largely frozen in outmoded assumptions and models.

Annette Nellen, Esq., CPA, CGMA, will examine changing work models and proposals for change in “Should Everyone Be an Employee? Policy for the Modern Workforce,” on Tuesday, Nov. 16, at 3:15 p.m. EST, during the AICPA & CIMA National Tax Conference. The annual conference begins Nov. 15, both live in Washington, D.C., and online, simultaneously with the AICPA & CIMA Sophisticated Tax Planning for Your Wealthy Clients Conference.

Nellen, a professor at San José State University and director of its Master of Science in Taxation program, is a past chair of the AICPA Tax Executive Committee. She also will present during the National Tax Conference a session called “Key 2021 Rulings: Business Tax Developments” (Nov. 15 at 11 a.m. EST).

In a recent interview, Nellen said she hopes the discussion of the ways people work will spark reflection on how policy might be adapted to better serve both business models and workers’ lives and careers. More workers than before are opting to be “free agents,” and online connectivity enables them to do so from anywhere and perhaps even be “digital nomads” with no permanent home, Nellen pointed out. However, tax and employment laws still often assume workers are tethered to a traditional office or other fixed place of work. 

The Fair Labor Standards Act (FLSA), which largely governs employment practices, was already outmoded by at least a decade ago, as noted in a U.S. House of Representatives hearing in 2011.

“At the hearing they were saying, ‘If everything has to be in these eight-hour increments, maybe there are different ways we should look at work,’ ” Nellen said. While employers may be willing to flex, they still generally must track the work hours of employees eligible for overtime pay under the FLSA and for other reasons.

“If you were to ask my students, they’d say, ‘Why can’t I work for a few hours, go to the gym, come back and do something else?’ ” Working families likewise tend to need some flexibility. In either case, gig work may seem a more attractive option.

“With parents, if their employer says, ‘I’m sorry, you have to be here from 7 to 3,’ and they say, ‘Well, why can’t I be here in hours when my child’s in school and I can still get them there and pick them up?’ I often hear that from Uber drivers. Not just the women, but the men might say, ‘This is what’s giving me flexibility.’ “

Tax law is similarly anachronistic and often inimical to workers’ concerns, Nellen said. The classification rules for employees versus independent contractors, which carry important implications for employment taxes, are confusing and often subjective. The 20 common law factors under Rev. Rul. 87-41 may conflict with the FLSA’s “economic realities” test and California’s “ABC test.”

While being an employee may be advantageous for some workers, it isn’t always for everyone. Offsetting an independent contractor’s requirement to pay self-employment tax (rather than have half that amount paid by an employer on his or her behalf) is the contractor’s ability to deduct ordinary and necessary expenses of his or her trade or business. Also, in many or most cases, the independent contractor can claim a qualified business deduction under Sec. 199A. But Nellen points out the latter provision is temporary, scheduled to sunset at the end of 2025.

“It would be very interesting to see if it just disappears, because, obviously, to renew it is going to be a cost,” she said of Sec. 199A.

Nellen also will touch on tax reporting for independent contractors and ways withholding could be made more feasible on Form 1099-NEC, Nonemployee Compensation, and Form 1099-K, Payment Card and Third Party Network Transactions. Taxpayer instruction needs to happen as well, regarding the basics of tax liability and recordkeeping, she said.

“The first time the IRS sees a 1099 or W-9 [Request for Taxpayer Identification Number] for the worker, they should work to educate them,” she said.

But more fundamentally, the changing workforce isn’t necessarily well-served by this either-or kind of classification. A hybrid class of “dependent contractors” could be created, or perhaps a category of “freelancer” could be added to Sec. 3508, which currently specifies nonemployee treatment of certain real estate agents and direct sellers.

Nellen said she hopes the session will prompt a view of classic tax and labor law problems from a fresh perspective.

“Hopefully, thinking of more things beyond just a basic classification and the key tax differences,” she said. Also, that any employers in the audience might think twice about the new work paradigm.

“Although some might be seeing their new hires and thinking they’re an anomaly, things are just different,” she said.

— Paul Bonner ([email protected]) is a JofA senior editor.