Federal report reveals tax misclassification of workers with disabilities depriving employees of important benefits and protections
For Immediate Release
March 7, 2025
WASHINGTON – Yesterday the National Council on Disability (NCD) released a report advising Congress, the President, and his Administration on the tax misclassification of workers with disabilities, potentially depriving workers of important employment benefits and protections.
In its advisement, titled “Tax Misclassifiation: Lost Employment Benefits for Disabled Workers,” NCD found that people with disabilities who are misclassified for federal and state employment tax purposes are ineligible for unemployment insurance and for workers’ compensation and must pay the full FICA tax, purchase their own health insurance, or rely on Medicaid.
At the report release during the Council’s quarterly meeting in Washington, NCD explained the impetus for its research into the topic. During the pandemic, attorneys representing a blind worker at a sheltered workshop in Louisiana contacted NCD about an unemployment appeal determination. Despite having worked at the same sheltered workshop for decades just like any other employee, earning minimum wage or higher, she was ineligible for unemployment benefits, including the enhanced COVID-era benefits, when the workshop closed due to COVID-19. Although the woman and her attorneys had thought she was an employee, the Louisiana Workforce Commission disagreed and concluded that she was a rehabilitation client for unemployment purposes and therefore ineligible for benefits.
In its research, NCD identified a still-operative 1965 Internal Revenue Service (IRS) Revenue Ruling (65-165) specific to sheltered workshops that may be inappropriately applied to classify workers with disabilities as either rehabilitation clients, even years after a rehabilitation program concludes, or as an independent contractor.
NCD’s investigation uncovered online bulletins used by tax attorneys and accountants to examine how this 1965 loophole allows sheltered workshops to misclassify workers with disabilities as “rehabilitation clients” for federal employment tax purposes in order to keep these putative employees off of the payroll.
NCD further found that while some workers with disabilities in sheltered workshops are classified as employees for protections under the Fair Labor Standards Act, they may not be classified as employees for tax purposes, stripping them of numerous benefits of employment.
“When workers with disabilities are misclassified, they miss out on so many important benefits of employment that help secure their financial futures,” said NCD Vice Chair and Acting Chair Shawn Kennemer. “When President H.W. Bush signed the bipartisan Americans with Disabilities Act into law 35 years ago, it was intended to level the playing field for people with disabilities and bring them into the economic mainstream,” he said. “Tax misclassification acts as a barrier to that laudable goal.”
“A 60-year-old revenue ruling rooted in a long-since rejected view of the employment potential of people with disabilities should not still be affording a loophole for employers that helps prevent workers with disabilities from receiving the safety nets of all workers,” said NCD Councilmember Neil Romano, a former NCD Chairman and previous Assistant Secretary of the U.S. Department of Labor during the George W. Bush administration.
NCD as an independent federal agency makes several recommendations in the report to key policymakers.
For example, NCD recommends Congress to remove a section of the tax code that exempts people with disabilities in sheltered workshops from the term “employment” under the Federal Unemployment Tax Act; and to hold hearings to identify outdated tax provisions and their impact on people with disabilities seeking employment.
NCD recommends that the IRS should conduct random employment tax audits focused on worker classification; should convene an interagency workgroup to identify other outdated tax provisions that may be used to prevent people with from attaining employment status for tax purposes; and that the Department of Treasury should revoke Revenue Ruling 65-165 as it creates a barrier to employment for people with disabilities.
“We are hopeful that federal policymakers will share NCD’s interest in digging deeper into this loophole and discover how pervasive this practice is and at what cost to American workers with disabilities,” said Romano.
Read the full report at NCD.gov.