Caught In The Crossfire
You're Not The Man, Man
In short, there are lots of bills out there — one might actually make it through. On top of that the IRS is making worker classification a central area of focus this year. Almost a third (30 percent) of IRS audits over the coming year will be based on employee classification issues, John Tuzynski, chief of Employment Tax Operations in the Small Business/Self-Employed Division, said at a workshop during the American Payroll Association's 26th Annual Congress. Furthermore, a new report by the Treasury Department's inspector general released in early February found that misclassified workers account for a significant portion of the tax gap (taxes not paid) and recommends the IRS build an agency-wide tax program to address the issue of worker classification to ultimately reduce the tax gap. In fact, of the approximately $345 billion tax gap the IRS estimates underreporting accounts for, about $54 billion with an estimated $1.6 billion collectible on worker misclassification. However, the $1.6 billion estimate is based on tax year 1984 data — that figure is surely higher today.
With some 98,000 registered reps who operate in the independent contractor model — over 40 percent of all advisors in FINRA membership — it's no wonder independent b/ds and their lobbying groups are worried. Many IBDs say challenges to their independent contractor status could pull the rug out from underneath one of the fundamentals of their business model. Not to mention, this legislation could open them up to audits, drive up b/d costs, and possibly lead to IRS determination that affiliated reps are not independent contractors.
Brian Kovack, one of the National Association of Independent Broker Dealers board members and co-founder and President of Kovack Securities, which has 250 independent contractor reps, says, “Ultimately [if reps had to be reclassified as employees], it would result in firms reducing payouts in order to pay The Federal Insurance Contributions ACT [FICA], in addition to having to pay for healthcare and increased litigation to possible regulatory actions against employees,” Kovack says.
Thin Gruel
At the end of the day, pre-tax margins at some independent b/ds are as low as two to three percent, says Kovack. He says some firms are already in the red due to the economy and the market, and, when you add 7.5 percent FICA tax, firms will have even less net income. Kovack says this means b/ds would have to restructure payouts to capture more revenue from reps. Not to mention, the rep in the field has his own OSJ or branch office and his own office expenses, which would then have to be shouldered by the b/d if they were classified as employees.
FSI has been making the rounds on Capitol Hill meeting with officials to help them work on the issue and are trying to get FSI members involved in the outreach to their local elected officials. Brown says, while the future remains unclear, they would ultimately hope to explore some kind of carve out to make sure the independent business model is not harmed by any legislation that amends worker classification status. Meanwhile, the Securities Industry and Financial markets Association, says it is also concerned about the proposed legislation. In a statement SIFMA said, “We are making the industry's concerns about this bill known to members of Congress, including the bill's authors.”
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