Independent Contractor Tax Fairness Act of 1995

Summary: Independent Contractor Tax Fairness Act of 1995 - Amends the Internal Revenue Code to provide for determining the employment status of individuals as employees for purposes of employment taxes. Requires a written qualified agreement in order for an individual who performs services for another (the service-recipient) to not be treated as an employee and sets forth the following conditions, of which at least one must be met, for the individual to not be treated as an employee and the service-recipient to not be treated as an employer:  (1) the individual can realize a profit or loss as a result of services performed for the service-recipient; (2) the individual maintains a separate principal place of business and has a significant investment in facilities or tools, which are not typically maintained by employees, used to perform services; (3) the services performed by the individual are available to the general public and the individual has performed such services other than as an employee for at least one other service-recipient during the year or the preceding calendar year; or (4) the individual is paid exclusively on a commission basis and maintains his or her principal place of business other than at the service recipient's place of business or pays fair market rental value for his or her principal place of business if such place is the service-recipient's place of business.  Requires the qualified agreement to specify, among other things:  (1) which services will be provided, the duration of such services, and the remuneration to be paid for such services; (2) that the service provider is aware of his or her Federal tax obligations; and (3) that the service-recipient will maintain a separate accounting of the income and expenses related to such agreement. 
Codifies section 530 of the Revenue Act of 1978, with revisions. 
Increases the penalty on service-recipients for failure to furnish information returns on services performed by independent contractors. 
Requires the Secretary of the Treasury to propose legislation to the Congress which specifies objectively measurable criteria for determining whether an individual is an employee.  Declares the intent of the Congress that such criteria allow taxpayers maximum latitude in determining employment status. 
Requires the Secretary to report to the Congress on efforts being made to give taxpayers such latitude.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Independent Contractor Tax Fairness 
Act of 1995''.

SEC. 2. CLARIFICATION OF EMPLOYMENT STATUS OF CERTAIN INDIVIDUALS; 
              CODIFICATION OF SECTION 530 SAFE HARBOR RULES.

    (a) General Rule.--Chapter 25 of the Internal Revenue Code of 1986 
(relating to general provisions applicable to employment taxes) is 
amended by adding at the end the following new section:

``SEC. 3510. DETERMINATION OF EMPLOYMENT STATUS.

    ``(a) Certain Individuals Not Treated As Employees.--
            ``(1) In general.--For purposes of this title, in the case 
        of an individual who meets the requirements of one of the 
        subparagraphs of paragraph (2) and who performs services 
        pursuant to a qualified agreement--
                    ``(A) such individual shall not be treated as an 
                employee, and
                    ``(B) the person for whom such services are 
                performed (hereafter in this subsection referred to as 
                the `service-recipient') shall not be treated as an 
                employer.
            ``(2) Requirements.--
                    ``(A) Realization of profit or loss.--An individual 
                meets the requirements of this subparagraph if the 
                individual can realize a profit or loss as a result of 
                the individual's services (in addition to the profit or 
                loss ordinarily realized by employees) performed for 
                the service-recipient.
                    ``(B) Separate principal place of business.--An 
                individual meets the requirements of this subparagraph 
                if the individual--
                            ``(i) maintains his principal place of 
                        business other than at a place of business of 
                        the service-recipient, and
                            ``(ii) has a significant investment in 
                        facilities or tools which are used by such 
                        individual to perform services of the type 
                        performed for the service-recipient and which 
                        are not typically maintained by employees.
                    ``(C) Making services available to the general 
                public.--An individual meets the requirements of this 
                subparagraph if--
                            ``(i) the services performed by the 
                        individual for the service-recipient are made 
                        available to the general public on a regular 
                        and consistent basis, and
                            ``(ii) the individual has performed such 
                        services other than as an employee (determined 
                        without regard to this subparagraph) for at 
                        least 1 other service-recipient during such 
                        year or the preceding calendar year.
                    ``(D) Paid on commission basis, etc.--An individual 
                meets the requirements of this subparagraph if--
                            ``(i) the individual is paid exclusively on 
                        a commission basis, and
                            ``(ii)(I) maintains his principal place of 
                        business other than at a place of business of 
                        the service-recipient, or
                            ``(II) pays fair market rental value for 
                        his principal place of business if such place 
                        is at a place of business of the service-
                        recipient.
            ``(3) Qualified agreement.--For purposes of this 
        subsection, the term `qualified agreement' means a written 
        agreement--
                    ``(A) which specifies the services to be provided, 
                the duration those services are to be provided, and the 
                remuneration to be paid for those services,
                    ``(B) which specifies that--
                            ``(i) the service provider reasonably 
                        believes that such provider meets the 
                        requirements under this section for being 
                        treated not as an employee with respect to such 
                        services and will not be treated by the 
                        service-recipient as an employee with respect 
                        to such services for Federal tax purposes, and
                            ``(ii) the service provider is aware of the 
                        Federal tax obligations resulting from such 
                        treatment, and
                    ``(C) which specifies that the service-recipient 
                will maintain a separate accounting of the income and 
                expenses related to such agreement.
            ``(4) Consequence of failing to meet test.--Failure to meet 
        the requirements of this subsection shall not be construed as 
        indicating that an individual is an employee of the service-
        recipient for purposes of this title.
    ``(b) Termination of Certain Employment Tax Liability.--
            ``(1) In general.--If--
                    ``(A) for purposes of employment taxes, the 
                taxpayer did not treat an individual as an employee for 
                any period, and
                    ``(B) in the case of periods after December 31, 
                1978, all Federal tax returns (including information 
                returns) required to be filed by the taxpayer with 
                respect to such individual for such period are filed on 
                a basis consistent with the taxpayer's treatment of 
                such individual as not being an employee,
        then for purposes of applying such taxes for such period with 
        respect to the taxpayer, the individual shall be deemed not to 
        be an employee unless the taxpayer had no reasonable basis for 
        not treating such individual as an employee.
            ``(2) Statutory standards providing one method of 
        satisfying the requirements of paragraph (1).--For purposes of 
        paragraph (1), a taxpayer shall in any case be treated as 
        having a reasonable basis for not treating an individual as an 
        employee for a period if the taxpayer's treatment of such 
        individual for such period was in reasonable reliance on any of 
        the following:
                    ``(A) Judicial precedent, published rulings, 
                technical advice with respect to the taxpayer, or a 
                letter ruling to the taxpayer.
                    ``(B) A past Internal Revenue Service audit of the 
                taxpayer in which there was no assessment attributable 
                to the treatment (for employment tax purposes) of the 
                individuals holding positions substantially similar to 
                the position held by this individual.
                    ``(C) Long-standing recognized practice of a 
                significant segment of the industry in which such 
                individual was engaged.
            ``(3) Subsequent treatment by taxpayer of individual as an 
        employee.--If--
                    ``(A) an individual is deemed not to be an employee 
                of the taxpayer under paragraph (1) for any prior 
                period, and
                    ``(B) such individual is treated by the taxpayer as 
                an employee for employment tax purposes for any 
                subsequent period,
        then, notwithstanding paragraph (1), for purposes of applying 
        such taxes for such prior period with respect to the taxpayer, 
        the individual shall be deemed not to be an employee.
            ``(4) Prospective termination of prior audit safe harbor.--
                    ``(A) In general.--If, after an employment tax 
                audit (and after providing the taxpayer an opportunity 
                for an appeal within the Internal Revenue Service), the 
                taxpayer is notified in writing by the Internal Revenue 
                Service that an individual (or individuals holding 
                substantially similar positions) should be treated as 
                employees for purposes of the employment taxes, 
                paragraph (2)(B) shall not apply with respect to such 
                individuals for any calendar month beginning more than 
                180 days after the date such notice is sent. The 
                preceding sentence shall not apply if the audit 
                referred to paragraph (2)(B) included an examination 
                for employment tax purposes of individuals holding 
                positions substantially similar to the positions held 
                by the individual involved.
                    ``(B) Employment tax audit.--For purposes of 
                subparagraph (A), the term `employment tax audit' means 
                any audit by the Internal Revenue Service which--
                            ``(i) was conducted solely for employment 
                        tax purposes, and
                            ``(ii) included an examination for 
                        employment tax purposes of individuals holding 
                        positions substantially similar to the 
                        positions held by the individual involved.
            ``(5) Clarification of significant segment of industry.--In 
        no event shall the `significant segment' requirement under 
        paragraph (2)(C) be interpreted to require a showing of the 
        practice of more than 25 percent of an industry. In applying 
        the preceding sentence, the Secretary shall allow taxpayers 
        maximum latitude in determining which industry is the 
        appropriate industry for purposes of applying such paragraph to 
        the taxpayer.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Employment tax.--The term `employment tax' means any 
        tax imposed by this subtitle.
            ``(2) Employment status.--The term `employment status' 
        means the status of an individual, under the usual common law 
        rules applicable in determining the employer-employee 
        relationship, as an employee or as an independent contractor 
        (or other individual who is not an employee).''
    (b) Rules To Apply for Income Tax Purposes.--Part I of subchapter B 
of chapter 1 of such Code is amended by adding at the end the following 
new section:

``SEC. 69. DETERMINATION OF EMPLOYMENT STATUS.

    ``For purposes of this subtitle, an individual shall not be treated 
as an employee of a person for any period if, under the rules of 
section 3510, such individual is treated as not being an employee of 
such person for such period.''
    (c) Conforming Amendment.--Section 530 of the Revenue Act of 1978 
is hereby repealed.
    (d) Clerical Amendments.--
            (1) The table of sections for chapter 25 of such Code is 
        amended by adding at the end the following new item:

                              ``Sec. 3510. Determination of employment 
                                        status.''
            (2) The table of sections for part I of subchapter B of 
        chapter 1 of such Code is amended by adding at the end the 
        following new item:

                              ``Sec. 69. Determination of employment 
                                        status.''
    (e) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall take effect beginning on 
        the first day of the first calendar year beginning after the 
        date of the enactment of this Act.
            (2) Repeal of section 530.--The amendment made by 
        subsection (c) shall apply to periods in calendar years 
        beginning after the date of the enactment of this Act.
            (3) Consistency rules.--In determining whether the 
        requirements of subsection (b)(1)(B) of section 3510 of the 
        Internal Revenue Code of 1986 (as added by subsection (a)) are 
        met with respect to any individual described in section 530(d) 
        of the Revenue Act of 1978 (as in effect on the day before the 
        date of the enactment of this Act), there shall be disregarded 
        any period for which such individual (or any other individual 
        holding a substantially similar position) was treated as an 
        employee by reason of such section 530(d).

SEC. 3. COMPLIANCE PROVISIONS.

    (a) Increase in Penalty on Service-Recipient for Failure To Furnish 
Form 1099's to Independent Contractors.--
            (1) In general.--Section 6722 of the Internal Revenue Code 
        of 1986 (relating to failure to file correct payee statements) 
        is amended by adding at the end the following new subsection:
    ``(d) Increase in Penalty With Respect to Statements for 
Services.--In the case of any statement required by section 6041(d) or 
section 6041A(e) to show payments for services, subsection (a) shall be 
applied by substituting `$75' for `$50' and subsection (c) shall be 
applied by substituting `$125' for `$100'.''
            (2) Effective date.--The amendment made by paragraph (1) 
        shall apply to statements the due date for which (determined 
        without regard to extensions) is after December 31, 1996.
    (b) Separate Listing of Payments Reported on Form 1099's.--The 
Secretary of the Treasury or his delegate shall modify the forms for 
returns of income tax so as to require the reporting for information 
purposes on a separate line of each amount for which the taxpayer 
received a statement under section 6041(d) or section 6041A(e) showing 
payments for services.
    (c) Information to Service-Recipients With Respect to Independent 
Contractors.--The Secretary of the Treasury or his delegate shall take 
such steps as the Secretary determines appropriate to inform service-
recipients of--
            (1) their obligations with respect to independent 
        contractors,
            (2) the modifications made by this Act in the rules for 
        determining whether or not an individual is an employee, and
            (3) the increase made by this Act in the penalties for 
        failures to furnish correct statements required by sections 
        6041(d) and section 6041A(e) of the Internal Revenue Code of 
        1986.

SEC. 4. DEPARTMENT OF THE TREASURY REQUIRED TO PROPOSE LEGISLATION.

    Not later than the date which is 180 days after the date of the 
enactment of this Act, the Secretary of the Treasury or his delegate 
shall submit a report to the Congress proposing legislation which 
specifies objectively measurable criteria for determining whether an 
individual (not otherwise treated as not being an employee under 
section 3508 or 3510(a) of the Internal Revenue Code of 1986) is an 
employee for purposes of such Code. It is the intent of the Congress 
that such criteria allow taxpayers maximum latitude in determining 
employment status.

SEC. 5. REPORT ON LATITUDE GIVEN TAXPAYERS IN DETERMINING EMPLOYMENT 
              STATUS.

    Not later than the date which is 1 year after the date of the 
enactment of this Act, the Secretary of the Treasury or his delegate 
shall submit a report to the Congress detailing the efforts being made 
by the Department of the Treasury in giving taxpayers maximum latitude 
in determining employment status under section 3510 of the Internal 
Revenue Code of 1986.