The common law test for determining whether an individual is an employee or independent contractor is relevant for a variety of purposes extending well beyond the withholding of employment taxes.
Now the reach of the test is further, affecting the new 20% deduction, the tax on exempt organization excess executive compensation, and the global intangible low-taxed income (GILTI) calculation.
Changes made by the 2017 tax law (often referred to as the “Tax Cut and Jobs Act”) render the common law test relevant to the application of a variety of new tax paradigms including sections 199A and 4960 as well as extension of the U.S. rules to the calculation of GILTI under section 951A. In particular, section 199A (the measure that permits an owner of a sole proprietorship, S corporation, or partnership to deduct up to 20% of the income earned by the business) and section 4960 (the provision that imposes an excise tax on certain remuneration and excess parachute payments) both incorporate the definition of common law employee.
Read a May 2019 report [PDF 90 KB] prepared by KPMG LLP: Employee or Not—Understanding and Appreciating the Common Law Test in a New Tax Paradigm
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.