Independent Contractor 2004 Law Change and how it may impact your business (Updated 7/28/07) * indicates updates.
Special thanks to David A. Rice of Strategic Policy Concepts (www.policyconcepts.com) for allowing us to quote from his publications in several sections of this site.
Many cultural organizations and art related businesses hire independent contractors (i.e. their earnings are reported via a 1099 IRS form if they are paid over $600 for the entire year. No taxes are taken out of the payment).
In 2004 there was a change to the Massachusetts State law governing Independent Contractors. The change to the law was enacted as part of the Public Construction Reform Act. The Committee that produced the bill was the Committee on State Administration. Our understanding is that the carpenter's union sponsored and pushed for this legislation.
However, under this law change, which adds to the established IRS 20 part test classifying what constitutes an independent worker, an individual is considered an employee of the company unless the company can establish ALL of the THREE below requirements as stated in the law:
a) such an individual has been and will continue to be from control and direction in connection with the performance of such services, both under his contract for the performance of service and in fact; and
b) such service is performed either outside the usual course of business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and
c) Such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
Translation: The individual must have a contract, decides when to start and when to stop work, uses their skill and knowledge to complete their work without any instruction or direction from the company. The service the individual provides does not duplicate any other employee's job at the company. For example, if an outside a graphic designer is hired to temporarily work at a company on site and there is already a graphic designer on the staff of that company, the company must W-2 the temporary graphic designer. But if the person you hire performs their work off site (i.e. they are not physically at the company's place of business(es)) and you fulfill the both (a) and (c) you are not an employee. The individual must regularly provide this work for others outside of the hiring company. This law now makes it next to impossible to be an independent contractor or a freelancer in this State.
Why is this important to employers? Many employers may have been misclassifying their independent contractors (i.e. they are breaking the law). IN other words those misclassifed independent contractor workers should be W-2 employees and the employer should have been paying payroll taxes, workers comp, social security, and taking withholdings from those workers. Under the new health care reform, employers have to count their full time equivalent (FTE) workers to find out what they are required to do under this new law to avoid being fined by the state. Those misclassified independent contractors should be W-2 employees and counted in the FTE assessment.*
Read the Advisory from the Attorney General's Office.
There is a loop hole in the law for nonprofit organizations and artists/performers, as identified by David A. Rice of Strategic Policy Concepts, in his publication, Analysis of Independent Contractor Law:
One of the key exceptions under chapter 62B is the following: "nothing in this paragraph shall authorize the commissioner to require any corporation, foundation, organization or institution that is exempt from federal taxation under Section 501(c)(3) of the Internal Revenue Code to withhold taxes from persons who are not employees, except where the payments made by the exempt person for a particular performance or other event exceed $10,000."
On November 18, 2005, the Massachusetts Department of Revenue issued regulations (830 CMR 62B.2.1) further clarifying the classification of employees vs. independent contractors in the performance and entertainment industries.
The regulation states the following: "A person or entity that pays performers* or performing entities compensation for one or more performances shall withhold. Compensation may not be paid to a performer or a performing entity unless the required tax has been withheld." However, the regulation also states that "a payer that is exempt from federal taxation under Section 501(c)(3) of the Code is not required to withhold taxes from persons who are not employees, unless the gross payment for a particular performance exceeds $10,000."
The Internal Revenue Service issues formal determinations regarding the status of workers as employees and independent contractors for purposes of determining federal withholding obligations. These determinations are made in response to requests submitted on IRS Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Tax Obligations). The Massachusetts Department of Revenue does not issue formal determinations in this area, but will accept a copy of the IRS determination and will treat the parties in accordance with that determination for Massachusetts withholding purposes. If a person has not obtained an IRS determination, the person may request one in accordance with the instructions on Form SS-8, which is available on the IRS website. In the absence of an IRS determination, the Massachusetts Department of Revenue will apply federal law for purposes of determining whether a company must deduct and withhold Massachusetts income taxes from moneys paid to its workers.
This means that an arts-related employer can obtain a determination of a worker's status, i.e. can she be considered and "independent contractor" for the purposes of withholding, and that determination can be submitted to the State as attestation of compliance with federal and state law, allowing the employer to abstain from withholding of the determination affirms the worker's status as an independent contractor rather than an employee.
* A performer may be (i) an athlete such as a wrestler, boxer, golfer, tennis player, sports team member or other athlete who is paid for competing, demonstrating, making a public appearance, or endorsing merchandise, as well as a person paid to further an athlete's performance or an athletic event performing services such as owner or leader of a performing entity; agent or manager of a performing entity or performer; referee, coach, or trainer; member of a production crew; or (ii) a paid entertainer or speaker, such as an actor, singer, musician, dancer, circus performer, comedian, celebrity, public speaker or lecturer, as well as any person paid to further an entertainer's or speaker's performance such as owner or leader of a performing entity; agent or manager of a performing entity or performer; or writer, director, coach, designer, or member of a sound, light, stage or production crew."
Translation: If an artists is paid under $10,000 by a non profit organization to create work- a performance, master class, visiting artist gig, an artist in residence gig, etc., they can still be considered an independent contractor and paid as such. (Note $10,000 is not per gig but is for the year- so if the artists does several gigs for the same nonprofit and their total pay from that non profit is under $10,000 for the year, you are fine to pay them as an independent contractor . If they earn over $10,000 from that non profit that non profit legally has to deduct and withhold Massachusetts income taxes from your pay if they are paying you/classifying you as a performer.)
The Artists Foundation is a member of a State-wide Task Force monitoring legislation that has been filed to change the law, please join the list serve on this and the AF's list serve to keep updated on this issue.