NTA Blog: Voluntary Withholding in the Taxpayer Assistance and Service Act

On January 30, 2025, a discussion draft of the Taxpayer Assistance and Service Act (“TAS Act”) was jointly released by Senator Mike Crapo, Chairman of the Senate Finance Committee, and Senator Ron Wyden, the Committee’s ranking member. The TAS Act represents a comprehensive effort to improve tax administration. Of the 68 provisions within the discussion draft, about 40 align with recommendations TAS advocated for in current and past Annual Reports to Congress and Purple Books of Legislative Recommendations. In previous blogs I highlighted the significance of this potential legislation in terms of enhancing taxpayer rights. In this blog, I will focus on Section 901of the TAS Act, which proposes a major change for independent contractors by authorizing voluntary withholding agreements.

The TAS Act: Making Income Tax Withholding Easier for Independent Contractors

Independent contractors, according to the Bureau of Labor Statistics, make up an ever growing portion of the workforce in the United States. As of 2023, there were nearly 12 million independent contractors in the country, representing about 7.4 percent of all employment. The percentage of independent contractors has been steadily increasing from about 6.9 percent in 2017, driven in large part by the rise in the gig economy. Gig businesses, such as ridesharing, food delivery, and house rental apps, provide flexibility for workers, but also create unique challenges when it comes to paying taxes.

Unlike employees, independent contractors are responsible for remitting their own income tax payments, meaning they must make up to four estimated tax payments during the year. However, independent contractors, for a variety of reasons, often run into problems getting their income tax remitted quarterly, potentially resulting in penalties under IRC § 6654. Some independent contractors may even find themselves unable to pay their end-of-year taxes, which can lead to penalties, interest, and potential IRS collection action (i.e., liens and levies). This not only places a heavy burden on the individual worker but also increases administrative costs for the IRS and may result in lost tax revenue if the taxes remain unpaid.

The TAS Act: A Solution to the Compliance Burden for Independent Contractors

To address these issues, the Taxpayer Advocate Service has recommended to Congress that the IRS permit independent contractors and businesses to enter into voluntary withholding agreements (i.e., an agreement between the worker and the business authorizing the business to withhold taxes on behalf of the worker, similar to how businesses withhold taxes for their employees). Such an agreement would simplify the tax compliance process for independent contractors, ensuring timely payment taxes, while reducing the risk of the independent contractor being subject to IRS penalties or collection actions.

Sec. 901 of the TAS Act would amend IRC § 3402(p), allowing businesses and their workers to enter into voluntary withholding agreements for non-wage remuneration. Under this provision, similar to employment tax withholdings, businesses would be able to withhold a portion of an independent contractor’s income to cover their taxes, effectively eliminating the need for quarterly payments and minimizing the risk of tax noncompliance.

While the provision does not explicitly address the issue of worker classification – whether the voluntary withholding agreement would be considered a factor in determining whether an individual is an employee or independent contractor – it does instruct the Secretary of Treasury to issue further guidance. I would recommend that the IRS issue guidance clarify that it would not consider such an agreement as a factor in determining worker classifications, thereby providing some much-needed certainty for businesses and contractors alike.

How this Provision Helps Independent Contractors

For independent contractors, Section 901 of the discussion draft represents a significant step toward simplifying tax compliance. By allowing businesses to withhold taxes on their behalf, the provision eliminates the need for contractors to keep track of quarterly payments, which can be a source of confusion and stress. Additionally, it helps ensure that workers pay their taxes in full and on time, reducing the risk of IRS penalties, interest, and collection actions.

This provision would make tax compliance easier for independent contractors, and implementation would be relatively easy for many businesses. In addition to paying independent contractors, most large companies have full-time employees, such as administrative staff, so they already have procedures in place to withhold.

Conclusion: A Win-Win for Independent Contractors and the IRS

This provision of law, if enacted, will allow many independent contractors to rest easy knowing the businesses for which they perform services are withholding and paying their income tax timely, thus avoiding potential issues with paying their quarterly income taxes. Further, making it easier for independent contractors to pay their income taxes timely prevents the IRS from having to take costly administrative steps to collect any past-due income tax.

In summary, this provision is a sensible solution to a longstanding issue faced by millions of independent contractors. It benefits both the IRS and the growing number of independent workers, by ensuring that they can pay their taxes easily and efficiently. I urge members of Congress to give serious consideration to this provision and the TAS Act as a whole. The TAS Act represents a critical step toward improving the U.S. tax system and supporting the growing gig economy.

Resources

The post Voluntary Withholding in the TAS Act appeared first on Taxpayer Advocate Service.

Source: taxpayeradvocate.irs.gov