218 lines
9.4 KiB
Markdown
218 lines
9.4 KiB
Markdown
---
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created_at: '2010-02-19T19:20:15.000Z'
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title: How a Tax Law Helps Insure a Scarcity of Programmers (1998)
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url: http://www.nytimes.com/1998/04/27/business/how-a-tax-law-helps-insure-a-scarcity-of-programmers.html?pagewanted=1
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author: Jasber
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points: 223
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story_text:
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comment_text:
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num_comments: 94
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story_id:
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story_title:
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story_url:
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parent_id:
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created_at_i: 1266607215
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_tags:
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- story
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- author_Jasber
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- story_1137669
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objectID: '1137669'
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year: 1998
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---
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Everywhere Mrs. Johnson went in the suburbs of the nation's capital, she
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said, she was offered work fixing and customizing software -- but only
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if she would close her business and become an employee.
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''They were afraid to do business with my company,'' Mrs. Johnson said.
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Two months ago, her bank account empty and creditors at the door, Mrs.
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Johnson gave up and took a job as a programmer, paying $69,000.
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Mrs. Johnson and thousands of other computer programmers who want to
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work for themselves instead of being employees have run afoul of a 1986
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law in which Congress decreed that most individual programmers cannot be
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entrepreneurs.
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The law generally excludes programmers from statutes giving employers
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some flexibility to use independent contractors. Critics say that the
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I.R.S. has recently stepped up its enforcement of the law in a way that
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effectively kills start-up programming businesses if their only employee
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is the founder.
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The law, which was introduced by Senator Daniel Patrick Moynihan,
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Democrat of New York, was estimated to raise $60 million over five
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years, a figure based on a belief by a staff member of the Congressional
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Joint Committee on Taxation that employees cheat less on their taxes
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than independent contractors do. That was enough money to pay for a tax
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break, approved with Mr. Moynihan's support, that was sought by I.B.M.
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for its overseas operations. Under the Gramm-Rudman deficit control act
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of the previous year, Congress was required to pay for any tax cuts with
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comparable revenue increases or spending cuts.
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A year after the law regarding contractors was enacted, the Senator
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tried to repeal it, but his bill died. In 1994, Senator William V. Roth,
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Republican of Delaware, the sponsor of this week's hearings, wrote Mr.
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Moynihan saying the programmers should get relief. More than 60 other
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senators have written similar letters since 1994, but they have not
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voted to change the law.
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Ginny Flynn, a spokeswoman for Mr. Roth, said that while the Senator
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believed that the law was unfair, he was not currently moving to change
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it because ''despite the fact the programmers are treated differently
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from other people, this opens a Pandora's box of other independent
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contractor issues.''
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Advertisement
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[Continue reading the main story](#story-continues-4)
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Programmers and their lawyers say that as a result of inaction by
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Congress, many corporations have revised their policies to explicitly
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forbid the hiring of programmers who are independent contractors.
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In response, some people, like Mrs. Johnson, incorporated. They reasoned
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that if they were employees of their own corporations they would be
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treated by the I.R.S. the way that many doctors and others are and could
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expand their enterprises.
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But internal I.R.S. documents show that in Alaska, California, Ohio,
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Minnesota, New York and New Jersey, I.R.S. auditors as recently as last
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year hunted for corporations created by computer programmers. They found
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scores of such companies and then disallowed them for tax purposes. The
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papers show that they were disallowed because they were less than a year
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old and had only one employee, the programmer who created the
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corporation.
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Across the country, officials of high-technology temporary-help
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companies said the I.R.S. audit tactic had caused many corporations to
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refuse to hire programmers unless they become employees, like Mrs.
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Johnson, or were employees of such temporary-help agencies.
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Mary E. Oppenheimer, an I.R.S. assistant chief counsel, said there was
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no national directive for auditors to hunt for incorporated programmers.
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However, she noted, Congress has directed the I.R.S. to look at the
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economic substance of tax matters, not just their legal form.
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In an earlier interview, Tom Burger, the director of employment taxes
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for the I.R.S., said one of the agency's difficulties ''is that, and I
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need to pick my words carefully, Congress passes laws, often without
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asking us about them, and then tells us to enforce them.''
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## Newsletter Sign Up
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[Continue reading the main story](#continues-post-newsletter)
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[View all New York Times newsletters.](/newsletters)
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The immediate effect of these audits is to force individual programmers
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like Mrs. Johnson to abandon their dreams of getting rich off their
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high-technology skills. But the broader impact is that small businesses
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started by one entrepreneur do not have a chance to grow into mighty
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enterprises that can create jobs and generate more taxes. ''Who do you
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know who would hire someone who will bring with them trouble from the
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I.R.S.?'' asked Harvey J. Shulman, the Washington lawyer for the
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National Association of Computer Consultant Businesses, who made the
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audit documents available.
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Mr. Shulman has challenged 52 such audits. ''I prevailed in 50 cases and
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partially in another, but at a cost to clients of $50,000 or more, and
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that is just ridiculous,'' he said.
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The association's 400 members, who had more than $5 billion of revenues
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last year, are mostly high-technology temporary-help agencies that hire
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programmers as employees and send them to companies on short-term
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assignments. They want the same flexibility to use contractors and
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individuals who have incorporated as other businesses do.
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Advertisement
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[Continue reading the main story](#story-continues-5)
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Don McLaurin, president of the Computer Consulting Group in Columbia,
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S.C., which hires programmers as employees and farms them out to
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companies for short-term projects, said the law and its enforcement
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''are having a devastating impact on the computer industry.''
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He said his business and his clients would benefit if he could use some
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independent contractors and some incorporated programmers.
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''This is Catch-22,'' he said. ''If you are not legitimate because you
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start out as a one-person corporation and you haven't been in business
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for a year, then how do you ever start your business? It is
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nonsensical.''
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Ed Myers, president of a company in El Segundo, Calif., that provides
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programmers to corporations, said that when his company was audited he
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and Mr. Shulman were able to defend the status of all but 3 of 50
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workers as independent contractors.
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''The auditor then said I had to give him two more people and I said,
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'what do you mean?' and he said he had to have five people he could
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reclassify as employees because that was what his boss demanded and that
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if I would give him two more names he would close the audit.
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''My first reaction was 'hell no,' because they are not truly
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employees,'' Mr. Myers said. ''But my second reaction was that it makes
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no economic sense for me to fight this because it would cost another
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$50,000 or more, so I gave him two names.''
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The two programmers, he said, no longer speak to him.
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Mr. Shulman said the association ''is not asking for a special privilege
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in repealing this law; we are just asking that programmers and other
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technical-services workers be treated the same as every other worker in
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America instead of being singled out for discriminatory treatment.''
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Donna Steele Flynn, a former member of the House Ways and Means
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Committee staff who is now a tax specialist with Ernst & Young, said,
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''The only reason this hasn't gotten fixed is because the official Joint
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Tax Committee estimate in the past was that repeal of Section 1706 would
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cost a billion dollars in tax revenue over five years.
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Advertisement
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[Continue reading the main story](#story-continues-6)
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''There is a political will on both sides of the aisle, but in terms of
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importance and number of people, a billion dollars is a lot of money for
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a relatively small number of people.''
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However, Ms. Flynn added, the official estimate seems wildly inflated.
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She noted that when legislation was considered last year that would
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allow employers broad discretion over whether to treat workers in any
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industry as employees or independent contractors, the tax revenue loss
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for the entire economy was estimated at the same $1 billion over five
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years.
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The I.R.S. estimates that it collects 99.5 percent of taxes due from
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employees, but far less from those who work as independent contractors.
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''Whether people cheat is a separate issue,'' Mr. Shulman said. He
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pointed to a Treasury Department study that found that programmers were
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more compliant taxpayers than other independent contractors.
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''The I.R.S. wants people to be employees because it is easier to
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collect revenue, but the revenue they are collecting from employees is
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less than the revenue they would collect from independent contractors --
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even if they cheat a little -- because they can make so much more,'' he
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said. ''Basically the I.R.S. is saying it would rather collect less
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revenue with less cheating than collect more revenue with more cheating.
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Does that make economic sense?''
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[Continue reading the main story](#whats-next)
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