On July 1, a congressional ban expires that has kept the Internal Revenue Service from declaring that many independent contractors, such as door-to-door salesmen and realtors, are really employes. Independent contractors, unlike employes, are not subject to income tax withholding or to unemployment tax, and they pay about one-third less Social Security tax than the combined employe-employer share. Those who hire independent contractors do not have to withhold taxes and fret over the paperwork as ordinary employers must.
Because of these differences, according to an IRS survey, independent contractors reported only 69 percent of their income for Social Security tax purposes and only 78 percent for income tax purposes. Groups such as the Direct Selling Association have attacked those figures, and said in a statement that "independent contractors do pay their taxes, and we completely reject the IRS conclusion that direct sellers are high in noncompliance."
Despite the end of the congressional ban on reclassification, IRS Commissioner Roscoe L. Egger Jr. has promised that his agency wants "to move slowly and deliberately and give Congress time to act" on the issue, and thus will not begin a massive reclassification effort. At least five bills on Capitol Hill would extend various protections to the independent contractor club. How many contractors are there? "That's one of the problems," an IRS official said. "We don't know."