Independent Contractor 2004 Law Change and how it may impact you (updated on 10/21/11)
Many artists earn their income or a key part of their income from being an independent contractor. Many cultural organizations and art related businesses hire independent contractors (i.e. their earnings are reported via a 1099 IRS form if they are paid over $600 for the entire year. No taxes are taken out of the payment).
In 2004 there was a change to the Massachusetts State law governing Independent Contractors. The change to the law was enacted as part of the Public Construction Reform Act. The Committee that produced the bill was the Committee on State Administration. Our understanding is that the carpenter's union sponsored and pushed for this legislation.
This law now makes it next to impossible to be an independent contractor or a freelancer in this state. However, it is our understanding that it will be the "employer" who will be fined for the violation by the Massachusetts Department of Revenue, not the person who is 1099ed. So just be aware of this law change. The burden is falling on the "employers" at the moment and DOR has not implemented a state-wide campaign to check individuals for violation of this law. DOR, however, in 2007 investigated two nonprofit arts organizations for violation of this law as part of "random" audits of those organizations.
It is key to understand if you are "employee" you do not controll the use of the intellectual property you create as an employee- your employer does. The employer owns the right to sell and use the intellectual property as they see fit (not the employee). So it is critical that artists of all disciplines can be independent contractors to be able to controll the intellectual property of what they create.
Under this state law change, which adds to the established IRS 20 part test classifying what constitutes an independent worker, an individual is considered an employee of the company unless the company can establish ALL of the THREE below requirements as stated in the law:
a) such an individual has been and will continue to be from control and direction in connection with the performance of such services, both under his contract for the performance of service and in fact; and
b) such service is performed either outside the usual course of business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and
c) Such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
Translation: The individual must have a contract, decides when to start and when to stop work, uses their skill and knowledge to complete their work without any instruction or direction from the company. The service the individual provides does not duplicate any other employee's job at the company. For example, if an outside a graphic designer is hired to temporarily work at a company "on site or not on site" and there is already a graphic designer on the staff of that company, the company must W-2 the temporary graphic designer. But if you are hired and perform your work off site (i.e. you are not physically at the company's place of business(es)), no one at the company does what you are being paid to do and you regularly provide this work for others outside of the hiring company- you are not an employee.
Read the Advisory from the Attorney General's Office.
There is a loop hole in the law for nonprofit organizations and artists/performers, as identified by David A. Rice of Strategic Policy Concepts, in his publication, Analysis of Independent Contractor Law:
One of the key exceptions under chapter 62B is the following: "nothing in this paragraph shall authorize the commissioner to require any corporation, foundation, organization or institution that is exempt from federal taxation under Section 501(c)(3) of the Internal Revenue Code to withhold taxes from persons who are not employees, except where the payments made by the exempt person for a particular performance or other event exceed $10,000."
On November 18, 2005, the Massachusetts Department of Revenue issued regulations (830 CMR 62B.2.1) further clarifying the classification of employees vs. independent contractors in the performance and entertainment industries.
The regulation states the following: "A person or entity that pays performers* or performing entities compensation for one or more performances shall withhold. Compensation may not be paid to a performer or a performing entity unless the required tax has been withheld." However, the regulation also states that "a payer that is exempt from federal taxation under Section 501(c)(3) of the Code is not required to withhold taxes from persons who are not employees, unless the gross payment for a particular performance exceeds $10,000."
IRS Determination
The Internal Revenue Service issues formal determinations regarding the status of workers as employees and independent contractors for purposes of determining federal withholding obligations. These determinations are made in response to requests submitted on IRS Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Tax Obligations). The Massachusetts Department of Revenue does not issue formal determinations in this area, but will accept a copy of the IRS determination and will treat the parties in accordance with that determination for Massachusetts withholding purposes. If a person has not obtained an IRS determination, the person may request one in accordance with the instructions on Form SS-8, which is available on the IRS website. In the absence of an IRS determination, the Massachusetts Department of Revenue will apply federal law for purposes of determining whether a company must deduct and withhold Massachusetts income taxes from moneys paid to its workers.
This means that an arts-related employer can obtain a determination of a worker's status, i.e. can she be considered and "independent contractor" for the purposes of withholding, and that determination can be submitted to the State as attestation of compliance with federal and state law, allowing the employer to abstain from withholding of the determination affirms the worker's status as an independent contractor rather than an employee.
* A performer may be (i) an athlete such as a wrestler, boxer, golfer, tennis player, sports team member or other athlete who is paid for competing, demonstrating, making a public appearance, or endorsing merchandise, as well as a person paid to further an athlete's performance or an athletic event performing services such as owner or leader of a performing entity; agent or manager of a performing entity or performer; referee, coach, or trainer; member of a production crew; or (ii) a paid entertainer or speaker, such as an actor, singer, musician, dancer, circus performer, comedian, celebrity, public speaker or lecturer, as well as any person paid to further an entertainer's or speaker's performance such as owner or leader of a performing entity; agent or manager of a performing entity or performer; or writer, director, coach, designer, or member of a sound, light, stage or production crew."
Translation: If you are paid under $10,000 by a non profit organization to create work- a performance, master class, visiting artist gig, an artist in residence gig, etc., you can still be considered an independent contractor and paid as such. (Note $10,000 is not per gig but is for the year- so if you do several gigs for the same nonprofit and your total pay from that non profit is under $10,000 for the year, you are fine. If you earn over $10,000 from that non profit that non profit legally has to deduct and withhold Massachusetts income taxes from your pay if they are paying you/classifying you as a performer.). We are researching if there is any information on if you are paid by a for profit organization/business.
WHAT IS BEING DONE AND WHAT YOU CAN DO:
An Act Relative to Independent Contractors Senate Bill S00957 and House Bill H01412
The bill was also filed in 2008 , refiled in 2009 and was refiled in 2011. It would amend the 2004 Independent Contractor law change. The 2004 law change is negatively impacting the artist community and the arts community because it made it next to impossible for people to be classified as independent contractors in this State. This amendment, however, would still keep key changes in place that keep employers from misusing the independent contractor worker category.
There is also an online petition that people can sign.
This is an important legilsation for artists & freelancers
For what you can do see http://www.artistsunderthedome.org/MAindependent_contractor.html
To be informed of Massachusetts Legislation that impacts artists of all disciplines and arts small businesses and nonprofits- join the ArtistsUndertheDome.org's free listserv and also see their section on pending Massachusetts legislation.