I

107TH CONGRESS

1ST SESSION H. R. 1783

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

for determining that certain individuals are not employees.

IN THE HOUSE OF REPRESENTATIVES

MAY 9, 2001

Mr. MANZULLO 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

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 Con5 tractor Determination Act of 2001’’.

6 SEC. 2. SAFE HARBOR FOR DETERMINING THAT CERTAIN

7 INDIVIDUALS ARE NOT EMPLOYEES.

8 (a) IN GENERAL.—Chapter 25 of the Internal Rev9 enue Code of 1986 (relating to general provisions relating
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1 to employment taxes) is amended by adding after section

2 3510 the following new section:

3 ‘‘SEC. 3511. SAFE HARBOR FOR DETERMINING THAT CER4 TAIN INDIVIDUALS ARE NOT EMPLOYEES.

5 ‘‘(a) SAFE HARBOR.—

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

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

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

9 met with respect to any service performed by any in10 dividual, then with respect to such service—

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

12 treated as an employee,

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

14 treated as an employer,

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

16 employer, and

17 ‘‘(D) compensation paid or received for

18 such service shall not be treated as paid or re19 ceived with respect to employment.

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

21 LIMIT APPLICATION OF OTHER LAWS.—Nothing in

22 this section shall be construed—

23 ‘‘(A) as limiting the ability of a service

24 provider, service recipient, or payor to apply

25 other provisions of this title, section 530 of the
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1 Revenue Act of 1978, or the common law in de2 termining whether an individual is not an em3 ployee, or

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

5 of any provision of law described in subpara6 graph (A).

7 ‘‘(b) SERVICE PROVIDER REQUIREMENTS WITH RE8 GARD TO THE SERVICE RECIPIENT.—For purposes of sub9 section (a), the requirements of this subsection are met

10 if the service provider, in connection with performing the

11 service—

12 ‘‘(1) has the ability to realize a profit or loss,

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

14 amount of time or to complete a specific result or

15 task, and

16 ‘‘(3) either—

17 ‘‘(A) has a significant investment in assets,

18 or

19 ‘‘(B) incurs unreimbursed expenses which

20 are ordinary and necessary to the service pro21 vider’s industry and which represent an amount

22 equal to at least 2 percent of the service pro23 vider’s gross income attributable to services

24 performed pursuant to 1 or more contracts de25 scribed in subsection (d).
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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 the service provider—

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

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

7 single service recipient’s facilities,

8 ‘‘(3) pays a fair market rent for use of the serv9 ice recipient’s facilities, or

10 ‘‘(4) operates primarily from equipment sup11 plied by the service provider.

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 service

15 provider are performed pursuant to a written contract be16 tween such service provider and the service recipient, or

17 the payor, and such contract provides that the service pro18 vider will not be treated as an employee with respect to

19 such services for Federal tax purposes and that the service

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

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

22 taxes and any other taxes.

23 ‘‘(e) BUSINESS STRUCTURE AND BENEFITS RE24 QUIREMENTS.—For purposes of subsection (a), the re-
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1 quirements of this subsection are met if the service

2 provider—

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

4 corporation or limited liability company under appli5 cable State laws, and

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

7 or payor any benefits that are provided to employees

8 of the service recipient.

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

10 section—

11 ‘‘(1) FAILURE TO MEET REPORTING REQUIRE12 MENTS.—If for any taxable year any service recipi13 ent or payor fails to meet the applicable reporting

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

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

16 is due to reasonable cause and not willful neglect,

17 the safe harbor provided by this section for deter18 mining whether individuals are not employees shall

19 not apply to such service recipient or payor with re20 spect to that service provider.

21 ‘‘(2) CORPORATION AND LIMITED LIABILITY

22 COMPANY SERVICE PROVIDERS.—

23 ‘‘(A) RETURNS REQUIRED.—If, for any

24 taxable year, any corporation or limited liability

25 company fails to file all Federal income and
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1 employment tax returns required under this

2 title, unless the failure is due to reasonable

3 cause and not willful neglect, subsection (e)

4 shall not apply to such corporation or limited li5 ability company.

6 ‘‘(B) RELIANCE BY SERVICE RECIPIENT OR

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

8 ‘‘(i) obtains a written statement from

9 a service provider which states that the

10 service provider is a properly constituted

11 corporation or limited liability company,

12 provides the State (or in the case of a for13 eign entity, the country), and year of, in14 corporation or formation, provides a mail15 ing address, and includes the service pro16 vider’s employer identification number, and

17 ‘‘(ii) makes all payments attributable

18 to services performed pursuant to 1 or

19 more contracts described in subsection (d)

20 to such corporation or limited liability com21 pany,

22 then the requirements of subsection (e)(1) shall

23 be deemed to have been satisfied.

24 ‘‘(C) AVAILABILITY OF SAFE HARBOR.—
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1 ‘‘(i) IN GENERAL.—For purposes of

2 this section, unless otherwise established to

3 the satisfaction of the Secretary, the num4 ber of covered workers which are not treat5 ed as employees by reason of subsection (e)

6 for any calendar year shall not exceed the

7 threshold number for the calendar year.

8 ‘‘(ii) THRESHOLD NUMBER.—For pur9 poses of this paragraph, the term ‘thresh10 old number’ means, for any calendar year,

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

12 (II) a number equal to 3 percent of cov13 ered workers.

14 ‘‘(iii) COVERED WORKER.—For pur15 poses of this paragraph, the term ‘covered

16 worker’ means an individual for whom the

17 service recipient or payor paid employment

18 taxes under subtitle C in all 4 quarters of

19 the preceding calendar year.

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

21 subsection (a), if—

22 ‘‘(A) a service provider, service recipient,

23 or payor establishes a prima facie case that it

24 was reasonable not to treat a service provider

25 as an employee for purposes of this section, and
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1 ‘‘(B) the service provider, service recipient,

2 or payor has fully cooperated with reasonable

3 requests from the Secretary or his delegate,

4 then the burden of proof with respect to such treat5 ment shall be on the Secretary.

6 ‘‘(4) RELATED ENTITIES.—If the service pro7 vider is performing services through an entity owned

8 in whole or in part by such service provider, the ref9 erences to service provider in subsections (b)

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

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

12 entity.

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

14 purposes of this title—

15 ‘‘(1) IN GENERAL.—

16 ‘‘(A) DETERMINATIONS WITH RESPECT TO

17 A SERVICE RECIPIENT OR A PAYOR.—A deter18 mination by the Secretary that a service recipi19 ent or a payor should have treated a service

20 provider as an employee shall be effective no

21 earlier than the notice date if—

22 ‘‘(i) the service recipient or the payor

23 entered into a written contract satisfying

24 the requirements of subsection (d),
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1 ‘‘(ii) the service recipient or the payor

2 satisfied the applicable reporting require3 ments of section 6041(a) or 6041A(a) for

4 all taxable years covered by the contract

5 described in clause (i), and

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

7 demonstrates a reasonable basis for deter8 mining that the service provider is not an

9 employee and that such determination was

10 made in good faith.

11 ‘‘(B) DETERMINATIONS WITH RESPECT TO

12 A SERVICE PROVIDER.—A determination by the

13 Secretary that a service provider should have

14 been treated as an employee shall be effective

15 no earlier than the notice date if—

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

17 contract satisfying the requirements of

18 subsection (d),

19 ‘‘(ii) the service provider satisfied the

20 applicable reporting requirements of sec21 tions 6012(a) and 6017 for all taxable

22 years covered by the contract described in

23 clause (i), and

24 ‘‘(iii) the service provider dem25 onstrates a reasonable basis for deter-
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1 mining that the service provider is not an

2 employee and that such determination was

3 made in good faith.

4 ‘‘(C) REASONABLE CAUSE EXCEPTION.—

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

6 (B)(ii) shall be treated as being met if the fail7 ure to satisfy the applicable reporting require8 ments is due to reasonable cause and not willful

9 neglect.

10 ‘‘(2) CONSTRUCTION.—Nothing in this sub11 section shall be construed as limiting any provision

12 of law that provides an opportunity for administra13 tive or judicial review of a determination by the Sec14 retary.

15 ‘‘(3) NOTICE DATE.—For purposes of this sub16 section, the notice date is the 30th day after the ear17 lier of—

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

19 proposed deficiency that allows the service pro20 vider, the service recipient, or the payor an op21 portunity for administrative review in the Inter22 nal Revenue Service Office of Appeals is sent,

23 or

24 ‘‘(B) the date on which the deficiency no25 tice under section 6212 is sent.
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1 ‘‘(h) DEFINITIONS.—For the purposes of this

2 section—

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

4 provider’ means any individual who performs a serv5 ice for another person.

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

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

8 the person for whom the service provider performs

9 such service.

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

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

12 service provider for the performance of such service

13 in the event that the service recipient does not pay

14 the service provider.

15 ‘‘(4) EXCEPTIONS.—The terms ‘service recipi16 ent’ and ‘payor’ do not include any entity in which

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

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

19 combined voting power of stock in the corpora20 tion, or

21 ‘‘(B) in the case of an entity other than a

22 corporation, the profits or beneficial interests in

23 the entity.

24 ‘‘(5) IN CONNECTION WITH PERFORMING THE

25 SERVICE.—The term ‘in connection with performing
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1 the service’ means in connection or related to the op2 eration of the service provider’s trade or business.

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

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

5 of business’ has the same meaning as under section

6 280A(c)(1).

7 ‘‘(7) FAIR MARKET RENT.—The term ‘fair mar8 ket rent’ means a periodic, fixed minimum rental fee

9 which is based on the fair rental value of the facili10 ties and is established pursuant to a written contract

11 with terms similar to those offered to unrelated per12 sons for facilities of similar type and quality.’’.

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

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

15 1978 (as added by section 1706 of the Tax Reform Act

16 of 1986) is repealed.

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

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

19 amended by adding at the end the following new item:

‘‘Sec. 3511. Safe harbor for determining that certain individuals

are not employees.’’

20 (d) EFFECTIVE DATES.—

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

22 this section shall apply to services performed after

23 the date of the enactment of this Act.
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1 (2) DETERMINATIONS BY THE SECRETARY.—

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

3 1986 (as added by subsection (a)) shall apply to de4 terminations after the date of the enactment of this

5 Act.

6 (3) SECTION 530(d).—The amendment made by

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

8 date of the enactment of this Act.

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