Tax Administration: Approaches for Improving Independent Contractor Compliance.

This report responds to your request that we review the tax administrative effects of the Internal Revenue Services IRs Employment Tax Examination Program ETEP. A major focus of this program is to examine small business compliance using the common law rules see app. I for classifying workers as either employees or independent contractors self-employed individuals who provide services. As we found in our 1977 report see app. II, the common law rules for classifying workers are unclear and subject to conflicting interpretations. Therefore, distinguishing between the two types of workers can be difficult for businesses. IRS can levy large tax assessments against businesses that misclassify workers as independent contractors. The rules for classifying a worker as an employee or an independent contractor come from the common law. Under the common law, the degree of control, or right to control, that a business has over a worker governs the classification. If a worker must follow instructions on when, where, and how to do the work, he or she is more likely to be an employee. IRS has adopted 20 common law rules for classifying workers. KAR P. 2