I

104TH CONGRESS

1ST SESSION H. R. 582

To amend the Internal Revenue Code of 1986 to revise the rules for determining the employment status of individuals as employees or independent

contractors.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 19, 1995

Mr. KIM 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 revise

the rules for determining the employment status of individuals as employees or independent contractors.

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 Fairness Act of 1995’’.
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1 SEC. 2. CLARIFICATION OF EMPLOYMENT STATUS OF CER2 TAIN INDIVIDUALS; CODIFICATION OF SEC3 TION 530 SAFE HARBOR RULES.

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

5 Revenue Code of 1986 (relating to general provisions ap6 plicable to employment taxes) is amended by adding at

7 the end the following new section:

8 ‘‘SEC. 3510. DETERMINATION OF EMPLOYMENT STATUS.

9 ‘‘(a) CERTAIN INDIVIDUALS NOT TREATED AS EM10 PLOYEES.—

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

12 in the case of an individual who meets the require13 ments of one of the subparagraphs of paragraph (2)

14 and who performs services pursuant to a qualified

15 agreement—

16 ‘‘(A) such individual shall not be treated as

17 an employee, and

18 ‘‘(B) the person for whom such services

19 are performed (hereafter in this subsection re20 ferred to as the ‘service-recipient’) shall not be

21 treated as an employer.

22 ‘‘(2) REQUIREMENTS.—

23 ‘‘(A) REALIZATION OF PROFIT OR LOSS.—

24 An individual meets the requirements of this

25 subparagraph if the individual can realize a

26 profit or loss as a result of the individual’s serv-
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1 ices (in addition to the profit or loss ordinarily

2 realized by employees) performed for the serv3 ice-recipient.

4 ‘‘(B) SEPARATE PRINCIPAL PLACE OF

5 BUSINESS.—An individual meets the require6 ments of this subparagraph if the individual—

7 ‘‘(i) maintains his principal place of

8 business other than at a place of business

9 of the service-recipient, and

10 ‘‘(ii) has a significant investment in

11 facilities or tools which are used by such

12 individual to perform services of the type

13 performed for the service-recipient and

14 which are not typically maintained by em15 ployees.

16 ‘‘(C) MAKING SERVICES AVAILABLE TO

17 THE GENERAL PUBLIC.—An individual meets

18 the requirements of this subparagraph if—

19 ‘‘(i) the services performed by the in20 dividual for the service-recipient are made

21 available to the general public on a regular

22 and consistent basis, and

23 ‘‘(ii) the individual has performed

24 such services other than as an employee

25 (determined without regard to this sub-
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1 paragraph) for at least 1 other service-re2 cipient during such year or the preceding

3 calendar year.

4 ‘‘(D) PAID ON COMMISSION BASIS, ETC.—

5 An individual meets the requirements of this

6 subparagraph if—

7 ‘‘(i) the individual is paid exclusively

8 on a commission basis, and

9 ‘‘(ii)(I) maintains his principal place

10 of business other than at a place of busi11 ness of the service-recipient, or

12 ‘‘(II) pays fair market rental value for

13 his principal place of business if such place

14 is at a place of business of the service-re15 cipient.

16 ‘‘(3) QUALIFIED AGREEMENT.—For purposes of

17 this subsection, the term ‘qualified agreement’

18 means a written agreement—

19 ‘‘(A) which specifies the services to be pro20 vided, the duration those services are to be pro21 vided, and the remuneration to be paid for

22 those services,

23 ‘‘(B) which specifies that—

24 ‘‘(i) the service provider reasonably

25 believes that such provider meets the re-
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1 quirements under this section for being

2 treated not as an employee with respect to

3 such services and will not be treated by the

4 service-recipient as an employee with re5 spect to such services for Federal tax pur6 poses, and

7 ‘‘(ii) the service provider is aware of

8 the Federal tax obligations resulting from

9 such treatment, and

10 ‘‘(C) which specifies that the service-recipi11 ent will maintain a separate accounting of the

12 income and expenses related to such agreement.

13 ‘‘(4) CONSEQUENCE OF FAILING TO MEET

14 TEST.—Failure to meet the requirements of this

15 subsection shall not be construed as indicating that

16 an individual is an employee of the service-recipient

17 for purposes of this title.

18 ‘‘(b) TERMINATION OF CERTAIN EMPLOYMENT TAX

19 LIABILITY.—

20 ‘‘(1) IN GENERAL.—If—

21 ‘‘(A) for purposes of employment taxes, the

22 taxpayer did not treat an individual as an em23 ployee for any period, and

24 ‘‘(B) in the case of periods after December

25 31, 1978, all Federal tax returns (including in-
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1 formation returns) required to be filed by the

2 taxpayer with respect to such individual for

3 such period are filed on a basis consistent with

4 the taxpayer’s treatment of such individual as

5 not being an employee,

6 then for purposes of applying such taxes for such

7 period with respect to the taxpayer, the individual

8 shall be deemed not to be an employee unless the

9 taxpayer had no reasonable basis for not treating

10 such individual as an employee.

11 ‘‘(2) STATUTORY STANDARDS PROVIDING ONE

12 METHOD OF SATISFYING THE REQUIREMENTS OF

13 PARAGRAPH (1).—For purposes of paragraph (1), a

14 taxpayer shall in any case be treated as having a

15 reasonable basis for not treating an individual as an

16 employee for a period if the taxpayer’s treatment of

17 such individual for such period was in reasonable re18 liance on any of the following:

19 ‘‘(A) Judicial precedent, published rulings,

20 technical advice with respect to the taxpayer, or

21 a letter ruling to the taxpayer.

22 ‘‘(B) A past Internal Revenue Service

23 audit of the taxpayer in which there was no as24 sessment attributable to the treatment (for em25 ployment tax purposes) of the individuals hold-
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1 ing positions substantially similar to the posi2 tion held by this individual.

3 ‘‘(C) Long-standing recognized practice of

4 a significant segment of the industry in which

5 such individual was engaged.

6 ‘‘(3) SUBSEQUENT TREATMENT BY TAXPAYER

7 OF INDIVIDUAL AS AN EMPLOYEE.—If—

8 ‘‘(A) an individual is deemed not to be an

9 employee of the taxpayer under paragraph (1)

10 for any prior period, and

11 ‘‘(B) such individual is treated by the tax12 payer as an employee for employment tax pur13 poses for any subsequent period,

14 then, notwithstanding paragraph (1), for purposes of

15 applying such taxes for such prior period with re16 spect to the taxpayer, the individual shall be deemed

17 not to be an employee.

18 ‘‘(4) PROSPECTIVE TERMINATION OF PRIOR

19 AUDIT SAFE HARBOR.—

20 ‘‘(A) IN GENERAL.—If, after an employ21 ment tax audit (and after providing the tax22 payer an opportunity for an appeal within the

23 Internal Revenue Service), the taxpayer is noti24 fied in writing by the Internal Revenue Service

25 that an individual (or individuals holding sub-
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1 stantially similar positions) should be treated as

2 employees for purposes of the employment

3 taxes, paragraph (2)(B) shall not apply with re4 spect to such individuals for any calendar

5 month beginning more than 180 days after the

6 date such notice is sent. The preceding sentence

7 shall not apply if the audit referred to para8 graph (2)(B) included an examination for em9 ployment tax purposes of individuals holding

10 positions substantially similar to the positions

11 held by the individual involved.

12 ‘‘(B) EMPLOYMENT TAX AUDIT.—For pur13 poses of subparagraph (A), the term ‘employ14 ment tax audit’ means any audit by the Inter15 nal Revenue Service which—

16 ‘‘(i) was conducted solely for employ17 ment tax purposes, and

18 ‘‘(ii) included an examination for em19 ployment tax purposes of individuals hold20 ing positions substantially similar to the

21 positions held by the individual involved.

22 ‘‘(5) CLARIFICATION OF SIGNIFICANT SEGMENT

23 OF INDUSTRY.—In no event shall the ‘significant

24 segment’ requirement under paragraph (2)(C) be in25 terpreted to require a showing of the practice of
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1 more than 25 percent of an industry. In applying

2 the preceding sentence, the Secretary shall allow tax3 payers maximum latitude in determining which in4 dustry is the appropriate industry for purposes of

5 applying such paragraph to the taxpayer.

6 ‘‘(c) DEFINITIONS.—For purposes of this section—

7 ‘‘(1) EMPLOYMENT TAX.—The term ‘employ8 ment tax’ means any tax imposed by this subtitle.

9 ‘‘(2) EMPLOYMENT STATUS.—The term ‘em10 ployment status’ means the status of an individual,

11 under the usual common law rules applicable in de12 termining the employer-employee relationship, as an

13 employee or as an independent contractor (or other

14 individual who is not an employee).’’

15 (b) RULES TO APPLY FOR INCOME TAX PUR16 POSES.—Part I of subchapter B of chapter 1 of such Code

17 is amended by adding at the end the following new section:

18 ‘‘SEC. 69. DETERMINATION OF EMPLOYMENT STATUS.

19 ‘‘For purposes of this subtitle, an individual shall not

20 be treated as an employee of a person for any period if,

21 under the rules of section 3510, such individual is treated

22 as not being an employee of such person for such period.’’

23 (c) CONFORMING AMENDMENT.—Section 530 of the

24 Revenue Act of 1978 is hereby repealed.

25 (d) CLERICAL AMENDMENTS.—
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1 (1) The table of sections for chapter 25 of such

2 Code is amended by adding at the end the following

3 new item:

‘‘Sec. 3510. Determination of employment status.’’

4 (2) The table of sections for part I of sub5 chapter B of chapter 1 of such Code is amended by

6 adding at the end the following new item:

‘‘Sec. 69. Determination of employment status.’’

7 (e) EFFECTIVE DATES.—

8 (1) IN GENERAL.—Except as provided in para9 graph (2), the amendments made by this section

10 shall take effect beginning on the first day of the

11 first calendar year beginning after the date of the

12 enactment of this Act.

13 (2) REPEAL OF SECTION 530.—The amendment

14 made by subsection (c) shall apply to periods in cal15 endar years beginning after the date of the enact16 ment of this Act.

17 (3) CONSISTENCY RULES.—In determining

18 whether the requirements of subsection (b)(1)(B) of

19 section 3510 of the Internal Revenue Code of 1986

20 (as added by subsection (a)) are met with respect to

21 any individual described in section 530(d) of the

22 Revenue Act of 1978 (as in effect on the day before

23 the date of the enactment of this Act), there shall

24 be disregarded any period for which such individual
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1 (or any other individual holding a substantially simi2 lar position) was treated as an employee by reason

3 of such section 530(d).

4 SEC. 3. COMPLIANCE PROVISIONS.

5 (a) INCREASE IN PENALTY ON SERVICE-RECIPIENT

6 FOR FAILURE TO FURNISH FORM 1099’S TO INDEPEND7 ENT CONTRACTORS.—

8 (1) IN GENERAL.—Section 6722 of the Internal

9 Revenue Code of 1986 (relating to failure to file cor10 rect payee statements) is amended by adding at the

11 end the following new subsection:

12 ‘‘(d) INCREASE IN PENALTY WITH RESPECT TO

13 STATEMENTS FOR SERVICES.—In the case of any state14 ment required by section 6041(d) or section 6041A(e) to

15 show payments for services, subsection (a) shall be applied

16 by substituting ‘$75’ for ‘$50’ and subsection (c) shall be

17 applied by substituting ‘$125’ for ‘$100’.’’

18 (2) EFFECTIVE DATE.—The amendment made

19 by paragraph (1) shall apply to statements the due

20 date for which (determined without regard to exten21 sions) is after December 31, 1996.

22 (b) SEPARATE LISTING OF PAYMENTS REPORTED ON

23 FORM 1099’S.—The Secretary of the Treasury or his dele24 gate shall modify the forms for returns of income tax so

25 as to require the reporting for information purposes on
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1 a separate line of each amount for which the taxpayer re2 ceived a statement under section 6041(d) or section

3 6041A(e) showing payments for services.

4 (c) INFORMATION TO SERVICE-RECIPIENTS WITH

5 RESPECT TO INDEPENDENT CONTRACTORS.—The Sec6 retary of the Treasury or his delegate shall take such steps

7 as the Secretary determines appropriate to inform service8 recipients of—

9 (1) their obligations with respect to independent

10 contractors,

11 (2) the modifications made by this Act in the

12 rules for determining whether or not an individual is

13 an employee, and

14 (3) the increase made by this Act in the pen15 alties for failures to furnish correct statements re16 quired by sections 6041(d) and section 6041A(e) of

17 the Internal Revenue Code of 1986.

18 SEC. 4. DEPARTMENT OF THE TREASURY REQUIRED TO

19 PROPOSE LEGISLATION.

20 Not later than the date which is 180 days after the

21 date of the enactment of this Act, the Secretary of the

22 Treasury or his delegate shall submit a report to the Con23 gress proposing legislation which specifies objectively

24 measurable criteria for determining whether an individual

25 (not otherwise treated as not being an employee under sec-
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1 tion 3508 or 3510(a) of the Internal Revenue Code of

2 1986) is an employee for purposes of such Code. It is the

3 intent of the Congress that such criteria allow taxpayers

4 maximum latitude in determining employment status.

5 SEC. 5. REPORT ON LATITUDE GIVEN TAXPAYERS IN DE6 TERMINING EMPLOYMENT STATUS.

7 Not later than the date which is 1 year after the date

8 of the enactment of this Act, the Secretary of the Treasury

9 or his delegate shall submit a report to the Congress de10 tailing the efforts being made by the Department of the

11 Treasury in giving taxpayers maximum latitude in deter12 mining employment status under section 3510 of the In13 ternal Revenue Code of 1986.

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