Department Of Labour & IRS Sign A MOU To Cooperate On Worker Misclassification

December 29, 2022
Department Of Labour & IRS Sign A MOU To Cooperate On Worker Misclassification

A number of companies that are involved in the Gig Economy were advised by mobilityView in June of 2022 that the Tax Authorities may move more quickly than the labour authorities.

The consequences of the Tax Authorities moving more quickly will accelerate the transition from "Independent Contractor" status to "Employee Status" at a pace much faster than the impact of the Labour Authorities.

Very simply - The impact of the Gig Worker paying taxes at an Employee level and the deductions for Payroll Taxes (Social Security, Unemployment, etc.) & the need for those Gig Companies to make their Employer contribution of Payroll taxes, will affect the Gig Companies much faster and with more impact than whatever the Labour Authorities might eventually get around to doing.

On December 14, 2022, the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) signed and published a Memorandum of Understanding for Employment Tax Referrals (the “MOU”). The MOU establishes a system for referrals from the DOL’s Wage & Hour Division (WHD) to the Small Business/Self Employed Specialty Employment Tax unit (“SB/SE”). The stated goal is: “To share information between the SB/SE and WHD to assist in the identification of emerging and ongoing employment tax compliance issues related to misclassification,”1 but its practical effect is to streamline the process for investigating and penalizing businesses that allegedly misclassify their employees as independent contractors. This is the latest memorandum of understanding between federal agencies focusing on perceived widespread worker misclassification in the labor market.

Why are the Tax Authorities so focused on the Gig Economy :

  1. Erosion of the income tax base
  2. Erosion of the social security (payroll taxes) base

The UK and their HMRC (Tax Department) was the 1st country in the world to start on this journey because the UK economy was the 1st to embrace the Contractor/Freelancer model en masse over 20 years ago. Individuals in the UK that were employees realized that there was a very large tax benefit to move from being an Employee to a "Gig Worker". The HMRC responded with IR35.

Here in Canada the Canadian Government is duplicating the IR35 approach and now have instituted a "Personal Service Business" PSB mandate that can have your contractor status immediately turn into the equivalent of being an employee for tax purposes.

It looks like the US is now on the path to duplicating what Canada and the UK have done as evidenced by the quote above.

We further anticipate that the IRS will lower the thresholds for reporting in the same way that they lowered the reporting requirements from $20,000 to $600 for Gig Workers as the IRS is clearly looking to go after Nickles & Dimes :

The reason for the lowering above is fairly simple :

  1. The Likelihood Of IRS Audit To Double For The Average American :
  2. IRS To Hire 87,000 Auditors Targeting Self Employed & Small Business Owners :
  3. 80% Of New IRS Revenue Will Come From Small Businesses Earning Under $200,000 :
  4. 41% Of Americans Are Turning To Gig Economy & Side Hustling To Make Ends Meet :
  5. 78% Of North Americans Are Looking For Extra Income To Relieve Financial Stress & 25% Looking To Gig/Side Hustle Work ;
  6. In 2019 59m Americans Derived Some Or All Of Their Income From The Gig Economy (36% Of The Entire Workforce) & 30% Of The EU Workforce Are Gig Economy Workers :

The US Government and governments all around the world simply can't afford to watch their Tax & Social Security Base erode and they don't understand that the inherit risk a worker has when working in the Gig Economy vs. being an Employee.

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Tax Deduction Changes For US Gig Workers :
Tax Deduction Changes For Canadian Gig Workers :
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