Repeal of Expanded Form 1099; Congressional Appropriation for Worker Misclassification

After much fanfare on the topic of Form 1099 reporting, Congress voted and on April 14 the president signed into law a bill repealing the expansion of the Form 1099 reporting requirements. Originally passed as part of the Patient Protection and Affordable Care Act, the new reporting rules would have required Form 1099s to be provided to corporations, and to be provided for the purchase of goods, starting in 2012. The Comprehensive 1099 Taxpayer Protection and Patient of Repayment of Exchange Subsidy Overpayments Act of 2011 has repealed the new reporting rules. Some believed that the new reporting rules would have given the IRS insight into independent contractor misclassification by giving it a method to examine payments to corporations, which arrangements might have been recharacterized as an employee/ employer arrangement between the service recipient and the corporation’s principal who provided the services. Others felt that that the IRS would have been so overwhelmed by the volume of Form 1099s filed that it would have been unable to use the expanded Form 1099 reporting to investigate alleged independent contractor misclassification.

The desire to root out for independent contractor misclassification by examining services provided through a corporation is still very much in prominence. The Payroll Fraud Prevention Act (S 770) that was introduced on April 8, 2011, would, among other items, pierce the so-called corporate veil by including in the definition of “non-employees” those who provide services through a corporation or LLC if they are required to create or maintain such entities as a condition of the provision of such labor or services.

Preventing worker misclassification is still a hot topic in the Congress, Funds are appropriated for this purpose in the budget compromise reached by the Congress on April 8, 20111 under the “Continuing Resolution”. Section 1807 provides that not less than $21.3 million is to be used by the Secretary of Labor for “program evaluation, initiatives related to the identification and prevention of worker misclassification, and other worker protection activities.”

Lisa Petkun

Richard Reibstein

Andrew Rudolph