Unseen Employer Tax Issues from the Affordable Care Act

Posted on Thu, Apr 11, 2013 ©2021 Drucker & Scaccetti

Our blog post on Wednesday, March 20th,  outlined the income and Social Security tax implications for employers and other service recipients depending on the classification of certain individuals who provide the services to them (i.e., whether these service providers are “employees” or “independent contractors”).  This is a longstanding area of controversy that is likely to continue at least until the tax law clearly defines what an “employee” really is. There is another possible wrinkle that has recently surfaced for employers and other service recipients.

 

As Tax Warriors at Drucker & Scaccetti (D&S), we view ourselves as solvers of complex tax situations as well as valued business advisors.  Our ability to view even the simplest tax issues in ‘3D’ often can unearth potential problems for clients well before they show up on their radar. Such is the case with the Affordable Care Act (“ACA”) as it relates to certain “employees.”  Let’s view this as an addendum to our previous post on this subject and pick up right where we left off.

 

The ACA significantly raises the stakes in the employer-independent contractor cases like the one referred to in our previous blog post on this subjectThis is because a business’s potential liability for the “pay or play” penalty taxes imposed by new IRC Section 4980H depends in part on how many “full-time employees” a business employs.  The Proposed Regulations published by the IRS in December make it clear that the “common law tests” apply under the ACA in determining whether an individual is an “employee” or an “independent contractor.”  A bona fide “independent contractor” is not an “employee” who has to be taken into account in applying the pay or play tax rules of Section 4980H. 

 

The new ACA regime also brings back another issue that we haven’t had to think about too much in recent years – the common law tests as to the identity of an individual’s “employer.”  The Section 4980H proposed regulations and the preamble emphasize this issue in several places, making clear that the IRS intends to apply the common law tests in determining the identity of the employer.  In part this issue is raised in the context of anti-avoidance rules. For example, the preamble notes the IRS’s concern that service recipients may try to use temporary employment agencies or employee leasing agencies to try to shift the “employer” status and burdens to a third party to avoid some of the costs of the ACA, while at the same time maintaining a de facto employer-employee relationship with the service provider. 

 

The impact in this context—as in the employee-independent contractor arena—is to shift the withholding and FICA burden as well as the ACA implications away from the service recipient: in one case to another “employer” (presenting possibly less risk of IRS challenges because at least there will be income and Social Security tax withholding) and in the other case to the service provider (if he/she is treated as in “independent contractor”).  Working with your employee benefits and labor attorneys, Drucker & Scaccetti can help clients strategize in addressing these issues, as we take into consideration the financial aspects of the impact of the ACA and how to best position your company from a tax and penalty perspective.

 

At D&S, we are constantly looking at the full, 360-degree impact of tax laws on businesses and individuals.  Taxes are not conceived in a vacuum and often have major impacts on other areas of your business.  This blog is not intended to provide legal advice and you should consult with legal counsel if you are unsure of how the ACA will impact your business, or just to make sure you are in compliance with the law as it pertains to ACA.

 

If you’d like to speak with a D&S expert in this area, please click the “Ask A Tax Warrior” button below or call us at (215) 665-3960. The Tax Warriors are always prepared to help you with this or any other tax-related matter.

Topics: ACA, employer, independent contractor, employee, IRC section 4980H, Tax, IRS, Affordable Care Act

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