Tax Reform Bill Contains Highway Trust Fund and Independent Contractor Provisions
On Wednesday, February 26th, House Ways and Means Chairman Dave Camp (R-MI) released his proposal for overhauling the tax code. The proposal contains supportive language, which preserves the rights of independent contractors and the businesses that depend upon them. Additionally, the proposal contains new funding options to keep the Highway Trust Fund (HTF) solvent until 2021.
Independent Contractor:
Under the provision, workers qualifying for a safe harbor would not be treated as an employee and the service recipient would not be treated as the employer for any Federal tax purpose. The safe harbor would also apply to three-party arrangements in which a payor other than the service recipient pays the worker. To qualify for the safe harbor, the worker would have to satisfy certain sales criteria and the worker and service recipient would be required to have a written agreement meeting specified requirements. In addition, the service recipient would withhold tax on the first $10,000 of payments made to the worker in a year at a rate of 5 percent. Amounts withheld under the safe harbor would be creditable by the worker against quarterly estimated-tax requirements.
Under current law, the IRS uses a subjective 20-factor common law test to determine a worker’s status. As a result, businesses, and especially small businesses that hire, and individuals who want to work as independent contractors, face considerable uncertainty as to whether the IRS will respect the classification. In cases where the IRS reclassifies an independent contractor as an employee, often years after the contractor and service recipient entered into their business arrangement, the result can be significant liability for back taxes, interest, and penalties.
The provision would provide much-needed certainty by providing a safe harbor under which a worker would be classified as an independent contractor if certain objective criteria were met, and the IRS generally would be barred from retroactively reclassifying the independent contractor if a good faith effort was made to qualify for the safe harbor.
Highway Trust Fund:
Under the provision, U.S. shareholders owning at least 10 percent of a foreign subsidiary would include as income (for their last tax year beginning before 2015) their pro rata share of the post-1986 historical earnings and profits (E&P) of the foreign subsidiary. To the extent, such E&P has not been previously subject to U.S. tax. The E&P would be bifurcated into E&P retained in the form of cash, cash equivalents, or certain other short-term assets, and E&P that has been reinvested in the foreign subsidiary’s business (property, plant and equipment). The portion of the E&P that consists of cash or cash equivalents would be taxed at a special rate of 8.75 percent, while any remaining E&P would be taxed at a special rate of 3.5 percent. Foreign tax credits would be partially available to offset the U.S. tax.
At the determination of the U.S. shareholder, the tax liability would be payable over a period of up to
eight years, based on a schedule of:
- 8 percent of the net tax liability in each of the first 5 years;
- 15 percent in the sixth year;
- 20 percent in the seventh year; and
- 25 percent in the eighth year.
The tax revenues generated directly by this one-time tax on accumulated E&P would be deposited into the Highway Trust Fund (HTF) as the revenues are received from taxpayers. Consistent with the current allocation of fuel excise tax revenues between the Highway Account and the Mass Transit Account in the HTF, 80 percent of the revenues raised by this provision would be allocated to the Highway Account, and 20 percent of the revenues would be allocated to the Mass Transit Account. This provision would provide $126.5 billion of revenue for the Highway Trust Fund to address the deep funding shortfall that currently exists for Federal transportation infrastructure projects, enough to eliminate the cumulative shortfall in the trust fund through 2021.
TIA fully supports both the independent contractors clarification language and shoring up the funding shortfall for the HTF. Although, the prospect of moving a comprehensive tax reform bill is unlikely in an election year, TIA will continue to work on your behalf on all the issues affecting the brokerage industry.
