I

106TH CONGRESS

1ST SESSION H. R. 1525

To amend the Internal Revenue Code of 1986 to provide simplified criteria,

in lieu of the common law rules, for determining whether an individual

is an employee or an independent contractor and to limit retroactive

employment tax reclassifications.

IN THE HOUSE OF REPRESENTATIVES

APRIL 22, 1999

Mr. KLECZKA (for himself, Mr. HOUGHTON, Mr. STARK, Mrs. JOHNSON of

Connecticut, Mr. MATSUI, Mr. ENGLISH, Mr. LEVIN, Mr. WELLER, Mr.

COYNE, Mr. FOLEY, Mr. MCDERMOTT, Mr. LEWIS of Georgia, Mr.

BOEHLERT, Mr. EVANS, Mr. KING, Mr. BARRETT of Wisconsin, Mr.

QUINN, and Mr. FORBES) introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide

simplified criteria, in lieu of the common law rules, for

determining whether an individual is an employee or

an independent contractor and to limit retroactive employment tax reclassifications.

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 Con5 tractor Clarification Act of 1999’’.
2

•HR 1525 IH

1 SEC. 2. DETERMINATION OF EMPLOYEE AND EMPLOYER

2 STATUS.

3 (a) IN GENERAL.—Subsection (c) of section 7701 of

4 the Internal Revenue Code of 1986 is amended to read

5 as follows:

6 ‘‘(c) EMPLOYEE AND EMPLOYER.—

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

8 except as otherwise expressly provided in this title—

9 ‘‘(A) an individual (hereinafter in this sub10 section referred to as the ‘service provider’) per11 forming services for another person (hereinafter

12 in this subsection referred to as the ‘service re13 cipient’) shall be treated as an employee of the

14 service recipient, and

15 ‘‘(B) the service recipient shall be treated

16 as the employer of such service provider,

17 unless the requirements of each of the subpara18 graphs of paragraph (3) have been satisfied.

19 ‘‘(2) REPEAL OF COMMON LAW TESTS.—The

20 rules of this subsection shall apply in lieu of any

21 common law rules which would otherwise apply.

22 ‘‘(3) REQUIREMENTS.—

23 ‘‘(A) LACK OF CONTROL BY SERVICE RE24 CIPIENT.—The requirements of this subpara25 graph are met only if the service provider has

26 the right, to the exclusion of the service recipi-
3

•HR 1525 IH

1 ent, to control and direct the manner of, and

2 the means used in, the service provider’s per3 formance of services for the service recipient.

4 ‘‘(B) AVAILABILITY OF SERVICE TO OTH5 ERS.—The requirements of this subparagraph

6 are met only if the service provider—

7 ‘‘(i) makes substantially similar serv8 ices available to others, and

9 ‘‘(ii) is not precluded by the service

10 recipient from soliciting business opportu11 nities that involve providing substantially

12 similar services for other persons during

13 the period that the service provider is pro14 viding services for the service recipient.

15 ‘‘(C) ENTREPRENEURIAL RISK.—The re16 quirements of this subparagraph are met only

17 if—

18 ‘‘(i) in the service provider’s overall

19 business activities, the service provider has

20 the potential to generate profit and bears

21 risk of loss and the extent to which profit

22 is generated or loss is sustained depends

23 on the service provider’s efforts and deci24 sions other than as to the amount of work

25 performed, and
4

•HR 1525 IH

1 ‘‘(ii) in the event the service provider

2 fails to perform the work in accordance

3 with the service recipient’s requirements,

4 the service provider is either subject to li5 ability to the service recipient for damages

6 arising from claims sounding in contract or

7 would be subject to such liability but for a

8 waiver by the service recipient.

9 ‘‘(4) PERSON.—For purposes of this subsection,

10 the term ‘person’ includes any governmental unit

11 (and any agency or instrumentality thereof).’’

12 (b) REPEAL OF SECTION 530 OF REVENUE ACT OF

13 1978.—Section 530 of the Revenue Act of 1978 is hereby

14 repealed.

15 (c) CONFORMING AMENDMENTS.—

16 (1) Paragraph (2) of section 3121(d) of such

17 Code is amended to read as follows:

18 ‘‘(2) any individual who is treated as an em19 ployee under section 7701(c); or’’.

20 (2) Paragraph (2) of section 210(j) of the So21 cial Security Act is amended to read as follows:

22 ‘‘(2) any individual who is treated as an em23 ployee under section 7701(c) of the Internal Rev24 enue Code of 1986; or’’.
5

•HR 1525 IH

1 (3) Subsection (a) of section 7701 of such Code

2 is amended by inserting after paragraph (33) the

3 following new paragraph:

4 ‘‘(34) INCLUDES AND INCLUDING.—The terms

5 ‘includes’ and ‘including’ when used in a definition

6 contained in this title shall not be deemed to exclude

7 other things otherwise within the meaning of the

8 term defined.’’

9 (d) EFFECTIVE DATE.—

10 (1) IN GENERAL.—Except as provided in para11 graph (2), the amendments made by this section

12 shall apply to services performed after December 31,

13 2000.

14 (2) REPEAL OF LIMITATIONS ON REGULATIONS

15 AND RULINGS.—The repeal made by subsection (b),

16 insofar as it relates to section 530(b) of the Revenue

17 Act of 1978, shall take effect on the date of the en18 actment of this Act; except that regulations and

19 Revenue Rulings permitted to be issued by reason of

20 such repeal may not apply to services performed be21 fore January 1, 2001.

22 SEC. 3. LIMITATIONS ON RETROACTIVE EMPLOYMENT TAX

23 RECLASSIFICATIONS.

24 (a) GENERAL RULE.—Chapter 25 of the Internal

25 Revenue Code of 1986 (relating to general provisions ap-
6

•HR 1525 IH

1 plicable to employment taxes) is amended by adding at

2 the end the following new section:

3 ‘‘SEC. 3511. LIMITATIONS ON RETROACTIVE EMPLOYMENT

4 TAX RECLASSIFICATIONS.

5 ‘‘(a) GENERAL RULE.—If—

6 ‘‘(1) for purposes of employment taxes, the tax7 payer treats an individual as not being an employee

8 for any period after December 31, 2000, and

9 ‘‘(2) for such period, the taxpayer meets—

10 ‘‘(A) the consistency requirements of sub11 section (b),

12 ‘‘(B) the return filing requirements of sub13 section (c), and

14 ‘‘(C) the safe harbor requirement of sub15 section (d),

16 for purposes of applying this subtitle for such period, the

17 individual shall be deemed not to be an employee of the

18 taxpayer for such period. The preceding sentence shall

19 cease to apply to periods beginning more than 60 days

20 after the date that the Secretary notifies the taxpayer in

21 writing of a final administrative determination that the

22 taxpayer should treat such individual (or any individual

23 holding a substantially similar position) as an employee.

24 ‘‘(b) CONSISTENCY REQUIREMENTS.—A taxpayer

25 meets the consistency requirements of this subsection with
7

•HR 1525 IH

1 respect to any individual for any period if the taxpayer

2 treats such individual (and all other individuals holding

3 substantially similar positions) as not being an employee

4 for purposes of the employment taxes for such period and

5 all prior periods after December 31, 1978.

6 ‘‘(c) RETURN FILING REQUIREMENTS.—The tax7 payer meets the return filing requirements of this sub8 section with respect to any individual for any period if all

9 Federal tax returns (including information returns) re10 quired to be filed by the taxpayer for such period with

11 respect to such individual are filed on a basis consistent

12 with the taxpayer’s treatment of such individual as not

13 being an employee.

14 ‘‘(d) SAFE HARBORS.—

15 ‘‘(1) IN GENERAL.—The taxpayer meets the

16 safe harbor requirement of this subsection with re17 spect to any individual for any period if the taxpayer

18 establishes that its treatment of such individual as

19 not being an employee for such period was—

20 ‘‘(A) in reasonable reliance on a written

21 determination (as defined in section

22 6110(b)(1)) issued to the taxpayer that ad23 dressed the employment status of the individual

24 or an individual holding a substantially similar

25 position with the taxpayer;
8

•HR 1525 IH

1 ‘‘(B) in reasonable reliance on a concluded

2 Internal Revenue Service audit of the taxpayer

3 in which the employment status of the indi4 vidual or any individual holding a substantially

5 similar position with the taxpayer was examined

6 and the taxpayer was notified in writing that no

7 change would be made to such individual’s em8 ployment status; or

9 ‘‘(C) supported by substantial authority.

10 For purposes of subparagraph (C), the term ‘sub11 stantial authority’ has the same meaning as when

12 used in section 6662(d)(2)(B)(i); except that such

13 term shall not include (i) any private letter ruling

14 issued to a person other than the taxpayer, and (ii)

15 any authority that does not address the employment

16 status of individuals holding positions substantially

17 similar to that of the individual.

18 ‘‘(2) SPECIAL RULES.—

19 ‘‘(A) APPLICATION TO PRE-2001 DETER20 MINATIONS, ETC.—Paragraph (1) shall apply

21 without regard to whether the determination,

22 audit, or the authority referred to therein was

23 before January 1, 2001.

24 ‘‘(B) SUBSEQUENT AUTHORITY.—The tax25 payer shall not be considered to meet the safe
9

•HR 1525 IH

1 harbor requirement of paragraph (1) with re2 spect to any individual for any period if the

3 treatment of such individual as not being an

4 employee is inconsistent with any regulation,

5 Revenue Ruling, Revenue Procedure, or other

6 authority—

7 ‘‘(i) which is published by the Sec8 retary at least 60 days before the begin9 ning of such period and after the date of

10 the determination, the conclusion of the

11 audit, or the substantial authority referred

12 to in paragraph (1), and

13 ‘‘(ii) which applies to the type of serv14 ices performed by such individual or the

15 industry or business in which such services

16 are performed.

17 ‘‘(3) TRANSITIONAL RULE.—Except as provided

18 in paragraph (2)(B), the taxpayer shall be consid19 ered to meet the safe harbor requirement of para20 graph (1) with respect to services performed by an

21 individual during 2001 or 2002 if the taxpayer

22 would be treated under section 530 of the Revenue

23 Act of 1978 (as in effect on the day before the date

24 of the enactment of this section) as having a reason-
10

•HR 1525 IH

1 able basis for not treating such individual as an em2 ployee.

3 ‘‘(e) OTHER SPECIAL RULES.—

4 ‘‘(1) NOTICE.—An officer or employee of the

5 Internal Revenue Service shall, before or at the com6 mencement of any audit inquiry relating to the em7 ployment status of one or more individuals who per8 form services for the taxpayer, provide the taxpayer

9 with a written notice of the provisions of this sec10 tion.

11 ‘‘(2) AVAILABILITY OF SAFE HARBORS.—Noth12 ing in this section shall be construed to provide that

13 this section only applies where the individual in14 volved is otherwise an employee of the taxpayer.

15 ‘‘(f) DEFINITIONS AND SPECIAL RULES.—For pur16 poses of this section—

17 ‘‘(1) EMPLOYMENT TAX.—The term ‘employ18 ment tax’ means any tax imposed by this subtitle.

19 ‘‘(2) EMPLOYMENT STATUS.—The term ‘em20 ployment status’ means the status of an individual

21 as an employee or as an independent contractor (or

22 other individual who is not an employee).

23 ‘‘(3) TAXPAYER.—The term ‘taxpayer’ includes

24 any person or entity (including a governmental enti25 ty) which is (or would be but for this section) liable
11

•HR 1525 IH

1 for any employment tax. Such term includes any

2 predecessor or successor to the taxpayer.

3 ‘‘(4) SUBSTANTIALLY SIMILAR POSITION.—The

4 determination as to whether an individual holds a

5 position substantially similar to a position held by

6 another individual shall include consideration of the

7 relationship between the taxpayer and such individ8 uals.

9 ‘‘(g) REGULATIONS.—The Secretary shall prescribe

10 such regulations as may be appropriate to carry out the

11 purposes of this section.’’

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

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

14 end the following new item:

‘‘Sec. 3511. Limitations on retroactive employment tax reclassifications.’’

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

16 this section shall apply to all periods beginning after De17 cember 31, 2000.

18 SEC. 4. STATUTE OF LIMITATIONS ON ASSESSMENT OF EM19 PLOYMENT TAXES TO RUN BEGINNING ON

20 DATE CERTAIN INFORMATION RETURNS

21 FILED.

22 (a) IN GENERAL.—Subsection (b) of section 6501 of

23 the Internal Revenue Code of 1986 (relating to limitations
12

•HR 1525 IH

1 on assessment and collection) is amended by adding at the

2 end the following new paragraph:

3 ‘‘(5) CERTAIN INFORMATION RETURNS TO

4 BEGIN LIMITATION PERIODS ON EMPLOYMENT

5 TAXES.—For purposes of this section, if—

6 ‘‘(A) a return is filed under section 6041

7 or 6041A which specifies an amount of pay8 ments made to any individual for services per9 formed by such individual, and

10 ‘‘(B) such payments are not taken into ac11 count in determining the taxes imposed by

12 chapters 21 and 24,

13 then, notwithstanding the last sentence of subsection

14 (a), such return shall be treated as the return re15 ferred to in subsection (a) for purposes of deter16 mining the period of limitations with respect to such

17 taxes on such services.’’

18 (b) EFFECTIVE DATE.—The amendment made by

19 this section shall apply to payments made after December

20 31, 2000.

Æ