Obama 2011 Budget - Potential Impacts for Employers and PEOs

Commentary from StaffMarket Services - February 2010

Obamas Budget Proposal for 2011 contains major items for employers and PEOs. If the 2011 budget gets approved as proposed, PEOs will need to expand their offering to assist business owners with significant changes to their employment and accounting practices. Employer related subjects will include the following areas.

Classification of Independent Contractors

Per the White House Fact Sheet:

“Protect Benefits for Employees by Ensuring Proper Classification. When employees are misclassified as independent contractors, they are deprived of benefits and protections to which they are legally entitled – such as overtime and unemployment benefits. Misclassification also has a budgetary impact, reducing receipts in Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds. As part of the 2011 Budget, the Departments of Labor and Treasury are pursuing a joint proposal that eliminates incentives in law for employers to misclassify their employees; enhances the ability of both agencies to penalize employers who misclassify; and restores protections to employees who have been denied them because of their improper classification. This proposal would increase Treasury receipts by more than $7 billion over 10 years. The 2011 Budget also includes an additional $25 million for the Department of Labor to hire 100 additional enforcement personnel and for competitive grants to boost States’ incentives and capacity to address this problem.”

Independent contractors receiving payments totaling $600 or more in a calendar year from a service recipient can require the service recipient to withhold for Federal tax purposes a flat rate percentage of their gross payments, with the flat rate percentage being selected by the contractor.

Potential Impacts for Employers

From the tenor of the White House Fact sheet it appears that the IRS and Department of Labor will be stepping up reviews of contractor classifications in order to increase tax revenues and provide workers’ compensation and benefits to more of the working population.

Potential Impacts for PEOs

PEOs should provide additional guidance to the clients about the rules for employee/contactor relationships and provide ongoing compliance reviews for their clients. In addition, if elected by the contractor, the new requirement for service recipients to withhold a flat rate percentage of the payments raises questions for service recipients about how the funds will be escrowed, remitted and reported to the IRS and the contractor. Although it may not be considered the PEO’s responsibility in a co-employment relationship, PEOs should be ready to handle and remit these funds on behalf of their clients who need this service.

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