Congress to Consider Withholding Taxes From Contractor Pay

The taxpayer advocate is recommending that independent contractors have taxes withheld from payments, similar to the system used to tax regular employees.

The advocate, Nina E. Olson, holds a position created by Congress in 1998 to ensure taxpayers are treated fairly by the Internal Revenue Service. Olson’s office is required to produce an annual report to Congress that lists the most pressing concerns in order of importance.

This year’s 509-page report listed the repeal of the alternative minimum tax first, but the second recommendation to withhold taxes from the pay of independent taxpayers is expected to garner the most attention.

Nancy Joerg, a labor lawyer who represents the management side of the debate, told the New York Times that the proposal was the wrong way to attack tax cheating among entrepreneurs who file a tax return with a Schedule C, which is used by many small businesses to report income and expenses.

"There are many legitimate contractors," said Ms. Joerg, a partner in Wessels & Pautsch in St. Charles, IL, "and to categorize all of them as tax cheats and take away all of the entrepreneurial advantages of being an independent contractor" and "imposing additional costs onto independent contractors just to discourage the classification of people as independent contractors is misguided."

Proponents of the idea say it will help those independent contractors who find themselves in trouble with the IRS when they fail to set aside enough to pay their taxes.

Topping this year’s list was the repeal of the alternative minimum tax. Enacted in 1969 the tax was intended to make sure that very high-income taxpayers cannot escape all income taxes, the Times reported, adding that in 1966, there were 155 taxpayers who made the equivalent of $1 million or more in today's dollars who paid no income taxes, the Treasury disclosed in 1969. The alternative minimum tax was set up for these people.

"The A.M.T. is bad policy and its repeal would simplify" the tax code, Olson wrote.

Her report also called for a capable research arm within the IRS that could look into the impact of agency policy on taxpayers.

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