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Small businesses will pay big bucks as changes to worker classification rules loom

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A lot of attention has been paid to increasing taxes, which are part of the Democrat-backed anti-inflation bill, and is passing Congress. And while those increases are a concern for both businesses and taxpayers, there is another rule coming from the Biden administration that will have an even greater impact on the costs of millions of small businesses.

New rules change the status of countless “independent contractors” to employees. So why is it such a big deal?

Small businesses rely on independent contractors to perform ad-hoc and infrequent tasks that typically don’t require the attention of full-time employees. Often referred to as “1099 workers” (thanks to the tax returns that must be filed with the IRS to report payments over $600), these freelancers (or “gig workers”) are often If you are an independent entrepreneur serving multiple customers.

They are truck drivers, software developers, project managers, construction workers, content producers, medical professionals, counselors and trainers. I belong to a professional organization that supports freelancers. Like millions of others, they can get projects and side jobs through his Fiverr, Craigslist, UpWork, Freelancer.com and other platforms. Most of these entrepreneurs operate independently as small business owners and make a living this way. Others enjoy the additional income these freelance opportunities provide.

But the Biden administration feels these independent contractors need more protection. That is why the Department of Labor (DOL) is taking action.

“The department now plans to engage in rulemaking to determine the status of employees or independent contractors under the Fair Labor Standards Act,” said the deputy administrator of the Labor Department’s wages and hours division. Jessica Luhmann recently wrote on the DOL blog. She “continues to work to ensure that employees are correctly identified when they are in fact employees so that they can receive the protections the FLSA provides.”

The DOL’s new rule discards multiple requirements that have long been used to determine whether a freelancer is truly independent or should be classified as an employee, and replaces those requirements with a more simplified Replace with “ABC test”. These new rules focus only on his three elements:

A: Workers are free from the control and direction of their employers in relation to the performance of their work.

B: The worker performs work outside the normal course of the employer’s business, and

C: Workers are typically engaged in an independently established trade, occupation, or business.

For small businesses, the biggest challenge is meeting the “B” rule. Essentially, because that particular test basically shows that small business owners can’t use 1099 workers to perform revenue-generating tasks for their business. The work must be “outside the normal course” of what his company does. Therefore, when charging a client for services performed by outside developers or tax professionals he uses, these outsiders cannot be treated as independent contractors.

Instead, these workers should be classified as employees. And that’s a big problem for small businesses. why? due to the large tax increase. Not only do small business owners have to withhold payroll taxes on these workers, they also have to pay the employer’s share of both Social Security and Medicare taxes, as well as related state and local taxes. . As employees, they may be eligible to participate in the company’s benefits plan, which may result in additional health insurance and retirement benefits.

Indeed, these workers are also protected under the Fair Labor Standards Act. They will also be given the freedom to form unions (which many opponents say is the main driving force behind the Biden administration’s actions). But do independent contractors and freelancers really want to be employees? Many contractors want to be their own boss and don’t want to be on the payroll. I like it. They serve multiple customers. They make their own choices, from billing to the clients they work with and the hours they work.

Karon Warren, Co-Leader of Fight For Freelancers USA, said: “There are 59 million independent contractors in this country. We are one-third of the U.S. workforce and the majority are happy. We need to stop the outrageous attempts to misclassify.”

Judy Kettler wrote for NBCNews.com: “According to the ABC test, companies should treat someone like me as an employee, with all the rights and benefits that go with it, even if I only write one article. The same goes for actors, artists, musicians, and all types of creatives who support themselves through gigs.In this situation, how many companies will continue to use our services? Impossible.”

Kettler was referring to the PRO Act, a labor rights bill (created under California’s controversial AB5 law) that failed to pass the Senate in 2021. That law, especially his ABC test. The ministry said he held his two public forums on the issue in June, with most experts expecting final worker classification rules by the end of the year.

Freelance organizations and other business groups will inevitably challenge judgments in court. There are already many legal challenges. It is also important to note that this ruling is by the DOL and does not affect how another agency, the IRS, defines independent contractors for tax filing purposes. Therefore, confusion and confusion are also inevitable.

Meanwhile, countless small business owners get stuck. With inflation, supply chain problems, labor shortages and a continued economic slowdown, these changes shouldn’t come at the worst possible time.

Gene Marks is the founder of The Marks Group, a small business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.

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