Tax Administration: Improving Independent Contractor Compliance with Tax Laws

GAO discussed how health care reform would affect independent contractors' compliance with tax laws. GAO noted that: (1) implementing a health care reform plan that forces employers to pay the majority of their employees' health insurance premiums could lead to many employers reclassifying their employees as independent contractors; (2) a large-scale reclassification of employees could jeopardize tax compliance and result in tax revenue losses because independent contractors are more likely to underreport their income, account for a larger share of the annual income tax gap, and be delinquent in paying taxes; (3) although proposed regulations could reduce employee misclassification by clarifying the classification rules, the business community has opposed any regulatory approach; (4) even though the Treasury Department has been informed about long-standing classification problems, unclear classification rules remain; (5) some health reform proposals contain measures to prevent tax revenue losses by improving independent contractors' information reporting or withholding taxes on payments to independent contractors; and (6) either approach should improve tax compliance without any changes to the classification rules.