From: linimon@nominil.lonesome.com (Mark Linimon)
Subject: Misc.jobs.contract: Text of USA IRS Section 1706; the Twenty Questions
Followup-To: poster
Organization: Lonesome Dove Computing Services
Date: Thu, 24 Dec 1992 08:10:21 GMT
Supersedes: <contract_s1706_722751615@nominil.lonesome.com>
Summary: the relevant parts of the US tax code that apply to contractors.
Expires: Thu, 4 Feb 1993 08:09:48 GMT
Reply-To: linimon@nominil.lonesome.com

Archive-name: contract-jobs/s1706
Version: 2.0
Last-Modified: Thu Dec 10 23:04:15 EST 1992

This periodic posting contains information relevant to a recurring
topic in misc.jobs.contract, mainly of interest to readers in the USA.
Its two companion postings, "Welcome to misc.jobs.contract"
<contract_welcome_725184616@nominil.lonesome.com> and "Misc.jobs.contract:
Frequently Asked Questions (FAQs)" <contract_faq_725184616@nominil.lonesome.com>
serve as an introduction to the group for new readers.

This posting includes the complete text of the USA Internal Revenue Service
Section 1706, defining the treatment of workers, such as contract engineers,
for tax purposes; a conference committee report regarding the intended
interpretation of Section 1706; the relevant sections of Section 530 of the
Revenue Act of 1978, as amended; and a listing of the "Twenty Questions"
used by the IRS to determine one's employment status.

------------------------------

Subject: table of contents.

	Subject: Complete text of USA IRS Section 1706.
	Subject: Notes accompanying USA IRS Section 1706.
	Subject: Conferrees' report about the amendment.
	Subject: The entire section 530 as referenced above.
	Subject: Definition of a few terms in Section 530.
	Subject: The Twenty Questions.
	Subject: Contributions to this posting.

------------------------------

Subject: Complete text of USA IRS Section 1706.

SEC. 1706. TREATMENT OF CERTAIN TECHNICAL PERSONNEL.
  (a) IN GENERAL - Section 530 of the Revenue Act of 1978 is
amended by adding at the end thereof the following new subsection:
  "(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 en-
gineer, designer, drafter, computer programmer, systems analyst, or
other similarly skilled worker engaged in a similar line of work."
  (b) EFFECTIVE DATE. - The amendment made by this section shall
apply to remuneration paid and services rendered after December 
31, 1986.

------------------------------

Subject: Notes accompanying USA IRS Section 1706.

Note: "another person" is the client in the traditional shop relationship.
      "taxpayer" is the shop.
      "individual","employee", or "worker" is you.

------------------------------

Subject: Conferrees' report about the amendment.

		Conference Report Language
		   on Section 1706

5. Treatment of certain technical personnel

			Present Law

  Section 530 of the Revenue Act of 1978, as amended, provides
generally that taxpayers who in the past had a resonable basis
(such as past industry practice) for not treating workers as employ-
ees may continue such treatment under certain circumstances,
without incurring employment tax liabilities.

			House Bill

No provision.

			Senate Amendment

  The Senate amendment provides that section 530 of the Revenue
Act of 1978 does not apply in the case of an individual who, pursu-
ant 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.  This provision is
effective for services performed after the date of enactment.  By
virtue of the exception to section 530 of the 1978 Act provided
under the Senate amendment, the prohibition against issuance of
regulations or rulings concerning employment tax status in section
530 of the 1978 Act does not prohibit issuance of regulations or rul-
ings with respect to the employment tax status of individuals with
respect to whom the Senate amendment applies.
  Under the Senate amendment, it is intended that certain individ-
uals retained by firms providing technical services are classified,
for income and employment tax purposes, as employees or as inde-
pendent contractors under the generally applicable common law
(nonstatutory) standards without regard to section 530 of the Reve-
nue Act of 1978.  Technical services firms have retained engineers,
designers, drafters, computer programmers, systems analysts, and
other similarly skilled personnel who are engaged in lines of work
similar to those listed for assignments for clients of the technical
services firms.  Some of these individuals have taken the position
that they should be treated as independent contractors, which
would relieve the technical services firms of the obligation to with-
hold income and employment taxes from their earnings.
  The Senate amendment applies whether the services of such in-
dividuals are provided by the firm to only one client during the
year or to more than one client, and whether or not such individ-
uals have been designated or treated by the technical services firm
as independent contractors, sole proprietors, partners, or employees
of a personal service corporation controlled by such individual.  The
effect of the provision cannot be avoided by claims that such tech-
nical service personnel are employees of personal service corpora-
tions controlled by such personnel.  For example, an engineer re-
tained by a technical services firm to provide services to a manu-
facturer cannot avoid the effect of this provision by organizing a
corporation that he or she controls and then claiming to provide
services as an employee of that corporation.
  This provision does not affect the application of Code section
414(n), relating to employee leasing, to technical services personnel
in circumstances where that provision applies under present law.
Also the provision does not apply with respect to individuals who
are classified, under the generally applicable common law stand-
ards, as employees of a business that is a client of the technical
services firm.

			Conference Agreement

  The conference agreement follows the Senate amendment with a
technical modification clarifying the language of the Senate
amendment to comform to the language of section 530 of the Reve-
nue Act of 1978 and with an amendment to the effective date.  The
conferees further clarify that the provision does not affect the ap-
plication of the Treasury's authority under Code section 414(o) to
prevent avoidance of certain employee benefit requirements.  The
conferees believe that the provision will provide more consistent
tax treatment of individuals performing services in the technical
service industry.
  The conference agreement is effective for remuneration paid and
services performed after December 31, 1986.

------------------------------

Subject: The entire section 530 as referenced above.

[Sorry about the lines that are a little long, I didn't want to reformat
the "ACT" in case its format influences its meaning :-) -- chuck@eng.umd.edu
(Chuck Harris) ]

ACT SEC. 530.  [Revenue Act of 1978 (P. L. 95-600) as amended by P. L. 
               96-167, P. L. 96-541 and P. L. 97-248]  CONTROVERSIES
	       INVOLVING WHETHER INDIVIDUALS ARE EM-
	       PLOYEES FOR PURPOSES OF THE EMPLOYMENT
	       TAXES.

   Act Sec. 530  (a)  TERMINATION OF CERTAIN EMPLOYMENT TAX LIABILITY.-

  (1)  IN GENERAL. -If-

  (A)  for purposes of employment taxes, the taxpayer did not treat an indi-
vidual 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 tax-
payer'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 tax-
payer had no reasonable basis for not treating such individual as an employee.

  (2)  STATUTORY STANDARDS PROVIDING ONE METHOD OF SATISFYING THE REQUIRE-
MENTS 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 IN-
DUSTRY 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 employ-
ment tax purposes for any period ending after December 31, 1978, 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, 1977.

  (4) REFUND OR CREDIT OF OVERPAYMENT.-If refund or credit of any overpay-
ment of an employment tax resulting from the application of paragraph (1) is
not barred on the date of the enactment of this Act 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 Act.

  Act Sec. 530  (b) PROHIBITION AGAINST REGULATIONS AND RULINGS ON EM-
PLOYMENT STATUS.-No regulation or Revenue Ruling shall be published on or
after the date of the enactment of this Act and before the effective date of any
law hereafter enacted clarifying the employment status of individuals for pur-
poses of the employment taxes 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.

  Act Sec 530 (c) DEFINITIONS.-For purposes of this section-

  (1) EMPLOYMENT TAX.-The term "employment tax" means any tax imposed
by subtitle C of the Internal Revenue Code of 1954.

  (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 con-
tractor (or other individual who is not an employee).

------------------------------

Subject: Definition of a few terms in Section 530.

1) The "taxpayer" is your client, or the company you work for.
2) The "individual" or "worker" is you.
3) Any reference to "employee" is you after you fail the tests!

------------------------------

Subject: The Twenty Questions.

[These rules were presented before the Committee on Ways and Means,
Independant Contractors, June 20, July 16 and 17, 1979, Serial 96-32.

I've left out the explanatory paragraphs that follow each of these rules.
The document I have runs about 5 pages ... There's no information about
how they score this during an audit.]

Under the common law, a worker is an employee if the person for whom he works
has the right to direct and control the way he works, both as to the final
result and as to the details of when, where, and how the work is to be done.
It is the IRS view that the employer need not actually exercise control.  It
is sufficient that he has the right to do so.  IRS has adopted 20 rules to
determine whether workers are employees.  In brief, these rules are directed
at the following questions:

1. Is the person providing services required to comply with instructions
   about when, where, and how the work is to be done?

2. Is the person provided training to enable him to perform a job in a
   particular method or manner?

3. Are the services provided integrated into the business' operation?

4. Must the services be rendered personally?

5. Does the business hire, supervise or pay assistants to help the person
   performing the services under contract?

6. Is the relationship between the individual and the person he performs
   services for a continuing relationship?

7. Who sets the hours of work?

8. Is the worker required to devote his full time to the person he performs
   services for?

9. Is the work performed at the place of the business of the potential
   employer?

10. Who directs the order or sequence in which the work must be done?

11. Are regular written or oral reports required?

12. What is the method of payment - hourly, commission or by the job?

13. Are business and/or traveling expenses reimbursed?

14. Who furnishes tools and materials used in providing services?

15. Does the person providing services have a significant investment
    in facilities used to perform services?

16. Can the person performing the services realize both a profit or a loss?

17. Can the person providing services work for a number of firms at the
    same time?

18. Does the person make his services available to the general public?

19. Is the person providing services subject to dismissal for reasons other
    than nonperformance of contract specifications?

20. Can the person providing services terminate his relationship without
    incurring a liability for failure to complete a job?

------------------------------

Subject: Contributions to this posting.

Thanks to chuck@eng.umd.edu (Chuck Harris) for the initial transcription
of section 1706 and section 530.  Thanks to skk@gsg.pa.dec.com (Stuart
Kreitman), jbauman@btr.btr.com, and/or ed@titipu.meta.com (Edward Reid)
for the Twenty Questions list.  Disclaimers: errors in editing are,
however, my own.  Be sure to consult either a lawyer and/or qualified
CPA before making your own decisions.

This posting is subject to comment and improvement by sending email to
linimon@nominil.lonesome.com.
-- 
    Mark Linimon / Lonesome Dove Computing Services / Roanoke, Virginia
   {chinacat,uunet}!nominil!linimon   ||    linimon@nominil.lonesome.com     
     "I keep my fingernails long, so they click when I play the piano."