II

106TH CONGRESS

1ST SESSION S. 344

To amend the Internal Revenue Code of 1986 to provide a safe harbor

for determining that certain individuals are not employees.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 3, 1999

Mr. BOND (for himself, Mr. NICKLES, Ms. SNOWE, Mr. COVERDELL, Mr.

BENNETT, and Mr. COCHRAN) 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 provide

a safe harbor for determining that certain 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 Simplification and Relief Act of 1999’’.
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1 SEC. 2. SAFE HARBOR FOR DETERMINING THAT CERTAIN

2 INDIVIDUALS ARE NOT EMPLOYEES.

3 (a) IN GENERAL.—Chapter 25 (relating to general

4 provisions relating to employment taxes) is amended by

5 adding after section 3510 the following new section:

6 ‘‘SEC. 3511. SAFE HARBOR FOR DETERMINING THAT CER7 TAIN INDIVIDUALS ARE NOT EMPLOYEES.

8 ‘‘(a) SAFE HARBOR.—

9 ‘‘(1) IN GENERAL.—For purposes of this title,

10 if the requirements of subsections (b), (c), and (d),

11 or the requirements of subsections (d) and (e), are

12 met with respect to any service performed by any in13 dividual, then with respect to such service—

14 ‘‘(A) the service provider shall not be

15 treated as an employee,

16 ‘‘(B) the service recipient shall not be

17 treated as an employer,

18 ‘‘(C) the payor shall not be treated as an

19 employer, and

20 ‘‘(D) compensation paid or received for

21 such service shall not be treated as paid or re22 ceived with respect to employment.

23 ‘‘(2) AVAILABILITY OF SAFE HARBOR NOT TO

24 LIMIT APPLICATION OF OTHER LAWS.—Nothing in

25 this section shall be construed—
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1 ‘‘(A) as limiting the ability of a service

2 provider, service recipient, or payor to apply

3 other provisions of this title, section 530 of the

4 Revenue Act of 1978, or the common law in de5 termining whether an individual is not an em6 ployee, or

7 ‘‘(B) as a prerequisite for the application

8 of any provision of law described in subpara9 graph (A).

10 ‘‘(b) SERVICE PROVIDER REQUIREMENTS WITH RE11 GARD TO THE SERVICE RECIPIENT.—For 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 the ability to realize a profit or loss,

16 ‘‘(2) agrees to perform services for a particular

17 amount of time or to complete a specific result or

18 task, and

19 ‘‘(3) either—

20 ‘‘(A) incurs unreimbursed expenses which

21 are ordinary and necessary to the service pro22 vider’s industry and which represent an amount

23 equal to at least 2 percent of the service provid24 er’s adjusted gross income attributable to serv-
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1 ices performed pursuant to 1 or more contracts

2 described in subsection (d), or

3 ‘‘(B) has a significant investment in assets.

4 ‘‘(c) ADDITIONAL SERVICE PROVIDER REQUIRE5 MENTS WITH REGARD TO OTHERS.—For the purposes of

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

7 if the service provider—

8 ‘‘(1) has a principal place of business,

9 ‘‘(2) does not primarily provide the service at a

10 single service recipient’s facilities,

11 ‘‘(3) pays a fair market rent for use of the serv12 ice recipient’s facilities, or

13 ‘‘(4) operates primarily from equipment not

14 supplied by the service recipient.

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

16 purposes of subsection (a), the requirements of this sub17 section are met if the services performed by the service

18 provider are performed pursuant to a written contract be19 tween such service provider and the service recipient, or

20 the payor, and such contract provides that the service pro21 vider will not be treated as an employee with respect to

22 such services for Federal tax purposes and that the service

23 provider is responsible for the provider’s own Federal,

24 State, and local income taxes, including self-employment

25 taxes and any other taxes.
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1 ‘‘(e) BUSINESS STRUCTURE AND BENEFITS RE2 QUIREMENTS.—For purposes of subsection (a), the re3 quirements of this subsection are met if the service

4 provider—

5 ‘‘(1) conducts business as a properly constituted

6 corporation or limited liability company under appli7 cable State laws, and

8 ‘‘(2) does not receive from the service recipient

9 or payor any benefits that are provided to employees

10 of the service recipient.

11 ‘‘(f) SPECIAL RULES.—For purposes of this

12 section—

13 ‘‘(1) FAILURE TO MEET REPORTING REQUIRE14 MENTS.—If for any taxable year any service recipi15 ent or payor fails to meet the applicable reporting

16 requirements of section 6041(a) or 6041A(a) with

17 respect to a service provider, then, unless the failure

18 is due to reasonable cause and not willful neglect,

19 the safe harbor provided by this section for deter20 mining whether individuals are not employees shall

21 not apply to such service recipient or payor with re22 spect to that service provider.

23 ‘‘(2) CORPORATION AND LIMITED LIABILITY

24 COMPANY SERVICE PROVIDERS.—
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1 ‘‘(A) RETURNS REQUIRED.—If, for any

2 taxable year, any corporation or limited liability

3 company fails to file all Federal income and

4 employment tax returns required under this

5 title, unless the failure is due to reasonable

6 cause and not willful neglect, subsection (e)

7 shall not apply to such corporation or limited li8 ability company.

9 ‘‘(B) RELIANCE BY SERVICE RECIPIENT OR

10 PAYOR.—If a service recipient or a payor—

11 ‘‘(i) obtains a written statement from

12 a service provider which states that the

13 service provider is a properly constituted

14 corporation or limited liability company,

15 provides the State (or in the case of a for16 eign entity, the country), and year of, in17 corporation or formation, provides a mail18 ing address, and includes the service pro19 vider’s employer identification number, and

20 ‘‘(ii) makes all payments attributable

21 to services performed pursuant to 1 or

22 more contracts described in subsection (d)

23 to such corporation or limited liability com24 pany,
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1 then the requirements of subsection (e)(1) shall

2 be deemed to have been satisfied.

3 ‘‘(C) AVAILABILITY OF SAFE HARBOR.—

4 ‘‘(i) IN GENERAL.—For purposes of

5 this section, unless otherwise established to

6 the satisfaction of the Secretary, the num7 ber of covered workers which are not treat8 ed as employees by reason of subsection (e)

9 for any calendar year shall not exceed the

10 threshold number for the calendar year.

11 ‘‘(ii) THRESHOLD NUMBER.—For pur12 poses of this paragraph, the term ‘thresh13 old number’ means, for any calendar year,

14 the greater of (I) 10 covered workers, or

15 (II) a number equal to 3 percent of cov16 ered workers.

17 ‘‘(iii) COVERED WORKER.—For pur18 poses of this paragraph, the term ‘covered

19 worker’ means an individual for whom the

20 service recipient or payor paid employment

21 taxes under subtitle C in all 4 quarters of

22 the preceding calendar year.

23 ‘‘(3) BURDEN OF PROOF.—For purposes of

24 subsection (a), if—
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1 ‘‘(A) a service provider, service recipient,

2 or payor establishes a prima facie case that it

3 was reasonable not to treat a service provider

4 as an employee for purposes of this section, and

5 ‘‘(B) the service provider, service recipient,

6 or payor has fully cooperated with reasonable

7 requests from the Secretary or his delegate,

8 then the burden of proof with respect to such treat9 ment shall be on the Secretary.

10 ‘‘(4) RELATED ENTITIES.—If the service pro11 vider is performing services through an entity owned

12 in whole or in part by such service provider, the ref13 erences to service provider in subsections (b)

14 through (e) shall include such entity if the written

15 contract referred to in subsection (d) is with such

16 entity.

17 ‘‘(g) DETERMINATIONS BY THE SECRETARY.—For

18 purposes of this title—

19 ‘‘(1) IN GENERAL.—

20 ‘‘(A) DETERMINATIONS WITH RESPECT TO

21 A SERVICE RECIPIENT OR A PAYOR.—A deter22 mination by the Secretary that a service recipi23 ent or a payor should have treated a service

24 provider as an employee shall be effective no

25 earlier than the notice date if—
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1 ‘‘(i) the service recipient or the payor

2 entered into a written contract satisfying

3 the requirements of subsection (d),

4 ‘‘(ii) the service recipient or the payor

5 satisfied the applicable reporting require6 ments of section 6041(a) or 6041A(a) for

7 all taxable years covered by the contract

8 described in clause (i), and

9 ‘‘(iii) the service recipient or the payor

10 demonstrates a reasonable basis for deter11 mining that the service provider is not an

12 employee and that such determination was

13 made in good faith.

14 ‘‘(B) DETERMINATIONS WITH RESPECT TO

15 A SERVICE PROVIDER.—A determination by the

16 Secretary that a service provider should have

17 been treated as an employee shall be effective

18 no earlier than the notice date if—

19 ‘‘(i) the service provider entered into a

20 contract satisfying the requirements of

21 subsection (d),

22 ‘‘(ii) the service provider satisfied the

23 applicable reporting requirements of sec24 tions 6012(a) and 6017 for all taxable
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1 years covered by the contract described in

2 clause (i), and

3 ‘‘(iii) the service provider dem4 onstrates a reasonable basis for determin5 ing that the service provider is not an em6 ployee and that such determination was

7 made in good faith.

8 ‘‘(C) REASONABLE CAUSE EXCEPTION.—

9 The requirements of subparagraph (A)(ii) or

10 (B)(ii) shall be treated as being met if the fail11 ure to satisfy the applicable reporting require12 ments is due to reasonable cause and not willful

13 neglect.

14 ‘‘(2) CONSTRUCTION.—Nothing in this sub15 section shall be construed as limiting any provision

16 of law that provides an opportunity for administra17 tive or judicial review of a determination by the Sec18 retary.

19 ‘‘(3) NOTICE DATE.—For purposes of this sub20 section, the notice date is the 30th day after the ear21 lier of—

22 ‘‘(A) the date on which the first letter of

23 proposed deficiency that allows the service pro24 vider, the service recipient, or the payor an op25 portunity for administrative review in the Inter-
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1 nal Revenue Service Office of Appeals is sent,

2 or

3 ‘‘(B) the date on which the deficiency no4 tice under section 6212 is sent.

5 ‘‘(h) DEFINITIONS.—For the purposes of this

6 section—

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

8 provider’ means any individual who performs a serv9 ice for another person.

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

11 in paragraph (4), the term ‘service recipient’ means

12 the person for whom the service provider performs

13 such service.

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

15 (4), the term ‘payor’ means the person who pays the

16 service provider for the performance of such service

17 in the event that the service recipient does not pay

18 the service provider.

19 ‘‘(4) EXCEPTIONS.—The terms ‘service recipi20 ent’ and ‘payor’ do not include any entity in which

21 the service provider owns in excess of 5 percent of—

22 ‘‘(A) in the case of a corporation, the total

23 combined voting power of stock in the corpora24 tion, or
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1 ‘‘(B) in the case of an entity other than a

2 corporation, the profits or beneficial interests in

3 the entity.

4 ‘‘(5) IN CONNECTION WITH PERFORMING THE

5 SERVICE.—The term ‘in connection with performing

6 the service’ means in connection or related to the op7 eration of the service provider’s trade or business.

8 ‘‘(6) PRINCIPAL PLACE OF BUSINESS.—For

9 purposes of subsection (c), the term ‘principal place

10 of business’ has the same meaning as under section

11 280A(c)(1) (as in effect for taxable years beginning

12 after December 31, 1998).

13 ‘‘(7) FAIR MARKET RENT.—The term ‘fair mar14 ket rent’ means a periodic, fixed minimum rental fee

15 which is based on the fair rental value of the facili16 ties and is established pursuant to a written contract

17 with terms similar to those offered to unrelated per18 sons for facilities of similar type and quality.’’

19 (b) REPEAL OF SECTION 530(d) OF THE REVENUE

20 ACT OF 1978.—Section 530(d) of the Revenue Act of

21 1978 (as added by section 1706 of the Tax Reform Act

22 of 1986) is repealed.

23 (c) CLERICAL AMENDMENT.—The table of sections

24 for chapter 25 of the Internal Revenue Code of 1986 is

25 amended by adding at the end the following new item:
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‘‘Sec. 3511. Safe harbor for determining that certain individuals

are not employees.’’

1 (d) EFFECTIVE DATES.—

2 (1) IN GENERAL.—The amendments made by

3 this section shall apply to services performed after

4 the date of the enactment of this Act.

5 (2) DETERMINATIONS BY THE SECRETARY.—

6 Section 3511(g) of the Internal Revenue Code of

7 1986 (as added by subsection (a)) shall apply to de8 terminations after the date of the enactment of this

9 Act.

10 (3) SECTION 531(d).—The amendment made by

11 subsection (b) shall apply to periods ending after the

12 date of the enactment of this Act.

Æ