To amend the Internal Revenue Code of 1986 to provide standards for determining employment status, and for other purposes.

Summary: Independent Contractor Tax Fairness and Simplification Act of 2012 - Amends the Internal Revenue Code to set forth criteria for classifying a worker as an employee or an independent contractor.

Prohibits: (1) any retroactive assessment of employment tax, except with respect to certain skilled workers, for tax periods after December 31, 1978, unless the employer had no reasonable basis for not treating a worker as an employee, and (2) the issuance, after the enactment of this Act, of Treasury regulations with respect to the employment status of any individual for purposes of the employment tax.

Establishes safe harbor provisions upon which a service recipient or payor may rely in classifying a service provider as an independent contractor rather than as an employee where the service provider: (1) incurs significant financial responsibility for providing and maintaining equipment and facilities to perform work under a contract; (2) incurs unreimbursed expenses or risks income fluctuations because remuneration is directly related to sales or other output rather than solely to the number of hours actually worked or expenses incurred; (3) is compensated on factors related to the work performed and not solely on the basis of hours or time expended; and (4) substantially controls the means and manner of performing the contract services, the specifications of the service recipient or payor, and any additional contractual requirements.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Independent Contractor Tax Fairness 
and Simplification Act of 2012''.

SEC. 2. FINDINGS.

    The Congress finds the following:
            (1) Independent contractors play a vital role in our 
        economy.
            (2) Independent contractors embrace the entrepreneurial 
        spirit of our country and are free to seek economic 
        opportunities that best fit their needs.
            (3) Many small businesses start as an independent 
        contractor and grow creating jobs for other individuals.
            (4) The proper classification of individuals as employees 
        and independent contractors is a significant responsibility for 
        businesses.
            (5) The rules and guidelines for determining whether an 
        individual is an independent contractor or an employee lack 
        clarity and consistency.
            (6) It is in the best interests of taxpayers, the Federal 
        Government and the business community to have fair and 
        objective rules for determining who is an independent 
        contractor and who is an employee.

SEC. 3. STANDARDS FOR DETERMINING EMPLOYMENT STATUS.

    (a) In General.--Chapter 25 of the Internal Revenue Code of 1986 
(general provisions relating to employment taxes) is amended by adding 
after section 3510 the following new sections:

``SEC. 3511. CONTROVERSIES INVOLVING WHETHER INDIVIDUALS ARE EMPLOYEES 
              FOR PURPOSES OF THE EMPLOYMENT TAXES.

    ``(a) 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 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, or
                    ``(C) long-standing recognized practice of a 
                significant segment of the industry in which such 
                individual was engaged.
            ``(3) Consistency required in the case of prior tax 
        treatment.--Paragraph (1) shall not apply with respect to the 
        treatment of any individual for employment tax purposes for any 
        period ending after December 31, 2012, if the taxpayer (or a 
        predecessor) has treated any individual holding a substantially 
        similar position as an employee for purposes of the employment 
        taxes for any period beginning after December 31, 2011.
            ``(4) Refund or credit of overpayment.--If refund or credit 
        of any overpayment of an employment tax resulting from the 
        application of paragraph (1) is not barred on the date of the 
        enactment of this section by any law or rule of law, the period 
        for filing a claim for refund or credit of such overpayment (to 
        the extent attributable to the application of paragraph (1)) 
        shall not expire before the date 1 year after the date of the 
        enactment of this section.
    ``(b) Prohibition Against Regulations and Rulings on Employment 
Status.--Except for purposes of providing Revenue Rulings with respect 
to section 3512, no regulation or Revenue Ruling shall be published on 
or after the date of the enactment of this section by the Department of 
the Treasury (including the Internal Revenue Service) with respect to 
the employment status of any individual for purposes of the employment 
taxes.
    ``(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).
    ``(d) Exception.--This section shall not apply in the case of an 
individual who, pursuant to an arrangement between the taxpayer and 
another person, provides services for such other person as an engineer, 
designer, drafter, computer programmer, systems analyst, or other 
similarly skilled worker engaged in a similar line of work.
    ``(e) Special Rules for Application of Section.--
            ``(1) Notice of availability of section.--An officer or 
        employee of the Internal Revenue Service shall, before or at 
        the commencement of any audit inquiry relating to the 
        employment status of one or more individuals who perform 
        services for the taxpayer, provide the taxpayer with a written 
        notice of the provisions of this section.
            ``(2) Rules relating to statutory standards.--For purposes 
        of subsection (a)(2)--
                    ``(A) a taxpayer may not rely on an audit commenced 
                after December 31, 1996, for purposes of subparagraph 
                (B) thereof unless such audit included an examination 
                for employment tax purposes of whether the individual 
                involved (or any individual holding a position 
                substantially similar to the position held by the 
                individual involved) should be treated as an employee 
                of the taxpayer,
                    ``(B) in no event shall the significant segment 
                requirement of subparagraph (C) thereof be construed to 
                require a reasonable showing of the practice of more 
                than 25 percent of the industry (determined by not 
                taking into account the taxpayer), and
                    ``(C) in applying the long-standing recognized 
                practice requirement of subparagraph (C) thereof--
                            ``(i) such requirement shall not be 
                        construed as requiring the practice to have 
                        continued for more than 10 years, and
                            ``(ii) a practice shall not fail to be 
                        treated as long-standing merely because such 
                        practice began after 1978.
            ``(3) Availability of safe harbors.--Nothing in this 
        section shall be construed to provide that subsection (a) only 
        applies where the individual involved is otherwise an employee 
        of the taxpayer.
            ``(4) Burden of proof.--
                    ``(A) In general.--If--
                            ``(i) a taxpayer establishes a prima facie 
                        case that it was reasonable not to treat an 
                        individual as an employee for purposes of this 
                        section, and
                            ``(ii) the taxpayer has fully cooperated 
                        with reasonable requests from the Secretary of 
                        the Treasury or his delegate,
                then the burden of proof with respect to such treatment 
                shall be on the Secretary.
                    ``(B) Exception for other reasonable basis.--In the 
                case of any issue involving whether the taxpayer had a 
                reasonable basis not to treat an individual as an 
                employee for purposes of this section, subparagraph (A) 
                shall only apply for purposes of determining whether 
                the taxpayer meets the requirements of subparagraph 
                (A), (B), or (C) of subsection (a)(2).
            ``(5) Preservation of prior period safe harbor.--If--
                    ``(A) an individual would (but for the treatment 
                referred to in subparagraph (B)) be deemed not to be an 
                employee of the taxpayer under subsection (a) 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, 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.
            ``(6) Substantially similar position.--For purposes of this 
        section, the determination as to whether an individual holds a 
        position substantially similar to a position held by another 
        individual shall include consideration of the relationship 
        between the taxpayer and such individuals.

``SEC. 3512. SAFE HARBOR STANDARDS FOR DETERMINING EMPLOYMENT STATUS.

    ``(a) General Rule.--For purposes of this title, if the 
requirements of subsection (c) are met with respect to any service 
performed by any service provider, then with respect to such service--
            ``(1) the service provider shall not be treated as an 
        employee,
            ``(2) the service recipient shall not be treated as an 
        employer,
            ``(3) the payor shall not be treated as an employer, and
            ``(4) compensation paid or received for such service shall 
        not be treated as paid or received with respect to employment.
    ``(b) Statutory Employees.--Nothing in this section shall supersede 
the categories of employees described in section 3121(d)(3).
    ``(c) Requirements.--
            ``(1) In general.--The requirements of this subsection are 
        met if the requirements of paragraphs (2) and (3) are met.
            ``(2) Investment or income fluctuation.--A service provider 
        meets the requirements of this paragraph if the service 
        provider--
                    ``(A) incurs significant financial responsibility 
                for providing and maintaining the necessary equipment 
                and facilities to perform the work outlined in their 
                qualified agreement, and
                    ``(B) either--
                            ``(i) incurs unreimbursed expenses, or
                            ``(ii) risks income fluctuations because 
                        the remuneration with respect to such service 
                        is directly related to sales or other output 
                        rather than solely to the number of hours 
                        actually worked or expenses incurred.
            ``(3) Control of time worked and performance of services.--
        A service provider meets the requirements of this paragraph if 
        the service provider--
                    ``(A) is compensated upon factors related to the 
                work performed, such as a percentage of revenue or 
                scheduled rates, and not solely on the basis of hours 
                or time expended, and
                    ``(B) substantially controls the means and manner 
                of performing the services, in conformance with 
                regulatory requirements, the specifications of the 
                service recipient or payor and any additional 
                requirements specified in the qualified agreement.
    ``(d) Definitions.--For the purposes of this section--
            ``(1) Service provider.--The term `service provider' means 
        any individual or entity that performs service for another 
        company under a qualified agreement.
            ``(2) Service recipient.--The term `service recipient' 
        means the person or entity for whom the service provider 
        performs such service.
            ``(3) Payor.--The term `payor' means the person or entity 
        that pays the service provider for the performance of such 
        service in the event that the service recipients do not pay the 
        service provider.
            ``(4) Exceptions.--The terms `service recipient' and 
        `payor' do not include any entity which is owned in whole or in 
        part by the service provider.
            ``(5) Qualified agreement.--The term `qualified agreement' 
        means a written contract between a service provider and the 
        service recipient for whom the services are performed or the 
        payor that provides that the service provider--
                    ``(A) will not be treated as an employee with 
                respect to such services for the purpose of this title, 
                and
                    ``(B) has been informed of the Federal tax 
                obligations resulting from such treatment.''.
    (b) Conforming Amendments.--
            (1) Section 530 of the Revenue Act of 1978 is hereby 
        repealed.
            (2) The table of sections for chapter 25 of such Code is 
        amended by adding at the end the following new items:

``Sec. 3511. Controversies involving whether individuals are employees 
                            for purposes of the employment taxes.
``Sec. 3512. Safe harbor standards for determining employment 
                            status.''.
    (c) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this Act shall take effect beginning on the 
        first day of the first calendar year beginning after the date 
        of enactment of this Act.
            (2) Repeal of section 530.--The amendment made by 
        subsection (b)(1) shall apply to periods in calendar years 
        beginning after the date of enactment of this Act.