II

104TH CONGRESS

2D SESSION S. 1610

To amend the Internal Revenue Code of 1986 to clarify the standards used

for determining whether individuals are not employees.

IN THE SENATE OF THE UNITED STATES

MARCH 13, 1996

Mr. BOND (for himself, Mr. NICKLES, Mr. DOLE, Mr. D’AMATO, Mr. MURKOWSKI, Mr. INHOFE, Mr. LOTT, Mr. GRAMM, and Mr. FRIST) introduced the following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to clarify

the standards used for determining whether individuals

are not employees.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Independent Contrac5 tor Tax Simplification Act of 1996’’.

6 SEC. 2. FINDINGS.

7 The Congress finds that:

8 (1) Simplifying the tax rules with respect to

9 independent contractors was the top vote-getter at
2

•S 1610 IS

1 the 1995 White House Conference on Small Busi2 ness. Conference delegates recommended that Con3 gress ‘‘should recognize the legitimacy of an inde4 pendent contractor’’. The Conference found that the

5 current common law is ‘‘too subjective’’ and called

6 upon the Congress to establish ‘‘realistic and con7 sistent guidelines’’.

8 (2) It is in the best interests of taxpayers and

9 the Federal Government to have fair and objective

10 rules for determining who is an employee and who

11 is an independent contractor.

12 SEC. 3. STANDARDS FOR DETERMINING WHETHER INDIVID13 UALS ARE NOT EMPLOYEES.

14 (a) IN GENERAL.—Chapter 25 of the Internal Reve15 nue Code of 1986 (general provisions relating to employ16 ment taxes) is amended by adding after section 3510 the

17 following new section:

18 ‘‘SEC. 3511. STANDARDS FOR DETERMINING WHETHER IN19 DIVIDUALS ARE NOT EMPLOYEES.

20 ‘‘(a) GENERAL RULE.—For purposes of this title,

21 and notwithstanding any provision of this title to the con22 trary, if the requirements of subsections (b), (c), and (d)

23 are met with respect to any service performed by any indi24 vidual, then with respect to such service—
3

•S 1610 IS

1 ‘‘(1) the service provider shall not be treated as

2 an employee,

3 ‘‘(2) the service recipient shall not be treated as

4 an employer,

5 ‘‘(3) the payor shall not be treated as an em6 ployer, and

7 ‘‘(4) compensation paid or received for such

8 service shall not be treated as paid or received with

9 respect to employment.

10 ‘‘(b) SERVICE PROVIDER REQUIREMENTS WITH RE11 GARD TO SERVICE RECIPIENT.—For the purposes of sub12 section (a), the requirements of this subsection are met

13 if the service provider, in connection with performing the

14 service—

15 ‘‘(1) has a significant investment in assets,

16 training, or both,

17 ‘‘(2) incurs significant unreimbursed expenses,

18 ‘‘(3) agrees to perform the service for a particu19 lar amount of time or to complete a specific result

20 and is liable for damages for early termination with21 out cause,

22 ‘‘(4) is paid primarily on a commissioned basis

23 or per unit basis, or

24 ‘‘(5) purchases products for resale.
4

•S 1610 IS

1 ‘‘(c) ADDITIONAL SERVICE PROVIDER REQUIRE2 MENTS WITH REGARD TO OTHERS.—For the purposes of

3 subsection (a), the requirements of this subsection are met

4 if—

5 ‘‘(1) the service provider—

6 ‘‘(A) has a principal place of business,

7 ‘‘(B) does not primarily provide the service

8 at the service recipient’s facilities,

9 ‘‘(C) pays a fair market rent for use of the

10 service recipient’s facilities, or

11 ‘‘(D) operates primarily from equipment

12 not supplied by the service recipient; or

13 ‘‘(2) the service provider—

14 ‘‘(A) is not required to perform service ex15 clusively for the service recipient, and

16 ‘‘(B) in the year involved, or in the preced17 ing or subsequent year—

18 ‘‘(i) has performed a significant

19 amount of service for other persons,

20 ‘‘(ii) has offered to perform service for

21 other persons through—

22 ‘‘(I) advertising,

23 ‘‘(II) individual written or oral

24 solicitations,
5

•S 1610 IS

1 ‘‘(III) listing with registries,

2 agencies, brokers, and other persons

3 in the business of providing referrals

4 to other service recipients, or

5 ‘‘(IV) other similar activities, or

6 ‘‘(iii) provides service under a busi7 ness name which is registered with (or for

8 which a license has been obtained from) a

9 State, a political subdivision of a State, or

10 any agency or instrumentality of 1 or more

11 States or political subdivisions.

12 ‘‘(d) WRITTEN DOCUMENT REQUIREMENTS.—For

13 purposes of subsection (a), the requirements of this sub14 section are met if the services performed by the individual

15 are performed pursuant to a written contract between

16 such individual and the person for whom the services are

17 performed, or the payor, and such contract provides that

18 the individual will not be treated as an employee with re19 spect to such services for purposes of this subtitle.

20 ‘‘(e) SPECIAL RULES.—For purposes of this sec21 tion—

22 ‘‘(1) FAILURE TO MEET REPORTING REQUIRE23 MENTS.—If for any taxable year any service recipi24 ent or payor fails to meet the applicable reporting

25 requirements of sections 6041(a), 6041A(a), or 6051
6

•S 1610 IS

1 with respect to a service provider, then, unless such

2 failure is due to reasonable cause and not willful ne3 glect, this section shall not apply in determining

4 whether such service provider shall not be treated as

5 an employee of such service recipient or payor for

6 such year.

7 ‘‘(2) RELATED ENTITIES.—If the service pro8 vider is performing services through an entity owned

9 in whole or in part by such service provider, then the

10 references to ‘service provider’ in subsections (b)

11 through (d) may include such entity, provided that

12 the written contract referred to in paragraph (1) of

13 subsection (d) may be with either the service pro14 vider or such entity and need not be with both.

15 ‘‘(f) DEFINITIONS.—For the purposes of this sec16 tion—

17 ‘‘(1) SERVICE PROVIDER.—The term ‘service

18 provider’ means any individual who performs service

19 for another person.

20 ‘‘(2) SERVICE RECIPIENT.—Except as provided

21 in paragraph (5), the term ‘service recipient’ means

22 the person for whom the service provider performs

23 such service.

24 ‘‘(3) PAYOR.—Except as provided in paragraph

25 (5), the term ‘payor’ means the person who pays the
7

•S 1610 IS

1 service provider for the performance of such service

2 in the event that the service recipients do not pay

3 the service provider.

4 ‘‘(4) IN CONNECTION WITH PERFORMING THE

5 SERVICE.—The term ‘in connection with performing

6 the service’ means in connection or related to—

7 ‘‘(A) the actual service performed by the

8 service provider for the service recipients or for

9 other persons for whom the service provider has

10 performed similar service, or

11 ‘‘(B) the operation of the service provider’s

12 trade or business.

13 ‘‘(5) EXCEPTIONS.—The terms ‘service recipi14 ent’ and ‘payor’ do not include any entity which is

15 owned in whole or in part by the service provider.’’

16 (b) CLERICAL AMENDMENT.—The table of sections

17 for chapter 25 of such Code is amended by adding at the

18 end the following new item:

‘‘Sec. 3511. Standards for determining whether individuals are

not employees.’’

19 (c) EFFECTIVE DATE.—The amendments made by

20 this Act shall apply to services performed before, on, or

21 after the date of the enactment of this Act.

Æ