I
104TH CONGRESS
1ST SESSION
H. R. 510
To amend the Internal Revenue Code of 1986 and the Revenue Act of
1978 to revise the procedures applicable to the determination of employ-
ment status.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 13, 1995
Mr. LANTOS (for himself and Mr. SHAYS) introduced the following bill; which
was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 and the Reve-
nue Act of 1978 to revise the procedures applicable to
the determination of employment status.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Misclassification of
Employees Act’’.
SEC. 2. PROCEDURES APPLICABLE TO DETERMINATIONS
OF EMPLOYMENT STATUS.
(a) WAIVER OF EMPLOYMENT TAX LIABILITY FOR
REASONABLE GOOD FAITH MISCLASSIFICATION BASED
ON COMMON LAW RULES.—
(1) IN GENERAL.—Section 3509 of the Internal
Revenue Code of 1986 (relating to determination of
employer’s liability for certain employment taxes) is
amended by adding at the end the following new
subsection:
‘‘(e) WAIVER OF EMPLOYMENT TAX LIABILITY FOR
REASONABLE GOOD FAITH MISCLASSIFICATION BASED
ON COMMON LAW RULES.—
‘‘(1) IN GENERAL.—For purposes of determin-
ing the liability of any taxpayer for employment
taxes with respect to any individual for any period,
such individual shall be deemed not to have been an
employee of the taxpayer for such period if—
‘‘(A) the taxpayer did not treat such indi-
vidual as an employee for purposes of the em-
ployment taxes for such period,
‘‘(B) the taxpayer’s treatment of such indi-
vidual as not being an employee was based on
a reasonable good faith misapplication of the
common law rules used for determining the em-
ployer-employee relationship,
‘‘(C) all Federal tax returns (including in-
formation returns) required to be filed by the
taxpayer with respect to such individual for
such period were filed on a basis consistent with
the taxpayer’s treatment of such individual as
not being an employee,
‘‘(D) the taxpayer (and any predecessor)
did not treat any other individual holding a
substantially similar position as an employee for
purposes of the employment taxes for any pe-
riod beginning after December 31, 1977, and
‘‘(E) the taxpayer enters into a closing
agreement under section 7121 with the Sec-
retary (in the time and manner determined by
the Secretary) agreeing to treat such individual,
and any other individual holding a substantially
similar position, as employees and to file all
Federal employment tax returns with respect to
such individuals on a basis consistent with the
taxpayer’s treatment of such individuals as em-
ployees.
‘‘(2) DEFINITIONS AND SPECIAL RULES.—
‘‘(A) EMPLOYMENT TAX.—For purposes of
this subsection, the term ‘employment tax’
means any tax imposed by subtitle C, including
any interest, penalty, or additional amount with
respect to such tax.
‘‘(B) NO REFUND OR CREDIT OF OVERPAY-
MENT.—No refund or credit of any overpay-
ment of an employment tax resulting from the
application of paragraph (1) shall be allowed,
notwithstanding that the period for filing a
claim for refund or credit of such overpayment
is not barred on the effective date of this sub-
section.
‘‘(3) TERMINATION.—This subsection shall not
apply if the closing agreement referred to in para-
graph (1)(E) is entered into more than 1 year after
the date of the enactment of this subsection.’’
(2) MONITORING OF CLOSING AGREEMENT RE-
QUIRED.—The Secretary of the Treasury or his dele-
gate shall monitor compliance with each closing
agreement referred to in section 3509(e)(1)(E) of
the Internal Revenue Code of 1986 (as added by
this section) for not less than 5 years after the date
such agreement is entered into. Such monitoring
shall include not only monitoring the payments made
to the individuals specified in the agreement but also
the aggregate wages paid to employees and the ag-
gregate payments to independent contractors for
services.
(b) MODIFICATIONS TO SAFE HARBOR FOR CLASSI-
FICATIONS OF INDIVIDUALS AS NONEMPLOYEES.—
(1) REQUIREMENT
OF
REASONABLE
BASIS.—
Paragraph (1) of section 530(a) of the Revenue Act
of 1978 (relating to controversies involving whether
individuals are employees for purposes of the em-
ployment taxes) is amended by striking ‘‘unless the
taxpayer had no reasonable basis’’ and inserting the
following: ‘‘if the taxpayer had a reasonable basis’’.
(2) ONLY RECENT EMPLOYMENT TAX AUDIT IS
REASONABLE
BASIS.—Paragraph (2) of section
530(a) of the Revenue Act of 1978 is amended—
(A) by striking the paragraph caption and
inserting the following: ‘‘REASONABLE
BASIS
FOR
NOT
TREATING
INDIVIDUAL
AS
EM-
PLOYEE.—’’,
(B) in the matter preceding subparagraph
(A)—
(i) by striking ‘‘in any case’’, and
(ii) by inserting ‘‘only’’ before ‘‘if the
taxpayer’s’’, and
(C) by striking subparagraph (B) and in-
serting the following new subparagraph:
‘‘(B)(i) an Internal Revenue Service audit
of the taxpayer—
‘‘(I) was conducted solely for employ-
ment tax purposes not more than 3 years
before such period, and
‘‘(II) included an examination for em-
ployment tax purposes of individuals hold-
ing positions substantially similar to the
positions held by the individual involved,
‘‘(ii) upon completion of such audit the
taxpayer was notified in writing by the Internal
Revenue Service that the treatment for employ-
ment tax purposes of the individuals referred to
in clause (i)(II) was correct, and
‘‘(iii) such notification is not revoked be-
fore such period; or’’.
(c) TERMINATION
OF TREATMENT
OF CERTAIN
TECHNICAL PERSONNEL.—Section 530 of the Revenue
Act of 1978 is amended by striking subsection (d).
(d) AUTHORITY FOR REGULATIONS AND RULINGS ON
EMPLOYMENT STATUS.—Section 530 of the Revenue Act
of 1978 is amended by striking subsection (b) and by re-
designating subsection (c) as subsection (b).
(e) PAYORS TO NOTIFY SERVICE PROVIDERS
OF
CONSEQUENCES OF EMPLOYMENT STATUS.—
(1) Section 6041 of such Code (relating to in-
formation at source) is amended by redesignating
subsection (e) as subsection (f) and by inserting
after subsection (d) the following new subsection:
‘‘(e) ADDITIONAL INFORMATION REQUIRED TO BE
INCLUDED ON STATEMENTS COVERING PAYMENTS FOR
SERVICES.—In the case of a statement required under
subsection (d) with respect to any payment for services,
such statement shall be treated as not satisfying the re-
quirements of subsection (d) unless such statement in-
cludes the following information:
‘‘(1) The payor is treating the payee as not
being an employee and the payee may be liable for
self-employment tax.
‘‘(2) If the payee believes that she should prop-
erly be treated as an employee, an explanation of the
procedure for obtaining Internal Revenue Service re-
view of her status.
‘‘(3) The payee will not be eligible for any em-
ployee fringe benefits and may lose protections or
benefits under Federal laws relating to fair labor
standards, occupational health and safety, civil
rights, unemployment insurance, and worker’s com-
pensation.
‘‘(4) An explanation of tax benefits to the self-
employed such as retirement plans and deduction for
a portion of the cost of health insurance.’’
(2) Section 6041A of such Code (relating to re-
turns regarding payments of remuneration for serv-
ices and direct sales) is amended by redesignating
subsection (f) as subsection (g) and by inserting
after subsection (e) the following new subsection:
‘‘(f) ADDITIONAL INFORMATION REQUIRED TO BE
INCLUDED ON STATEMENTS.—In the case of a statement
required under subsection (e), such statement shall be
treated as not satisfying the requirements of subsection
(e) unless such statement includes the information speci-
fied in paragraphs (1) through (4) of section 6041(e).’’
(f) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall take effect beginning on the date which is 120
days after the date of the enactment of this Act.
(2) MODIFICATIONS TO SAFE HARBOR; TERMI-
NATION
OF
TREATMENT
OF
TECHNICAL
PERSON-
NEL.—The amendments made by subsections (b)
and (c) shall apply to periods ending on or after the
date which is 120 days after the date of the enact-
ment of this Act.
SEC. 3. CLASSIFICATION OF INDIVIDUALS AS EMPLOYEES
FOR PURPOSES OF UNEMPLOYMENT COM-
PENSATION PROGRAM.
(a) UNIFORM FEDERAL AND STATE DEFINITION OF
EMPLOYEE.—Subsection (a) of section 3304 of the Inter-
nal Revenue Code of 1986 (relating to requirements for
approval of State unemployment compensation laws) is
amended by striking ‘‘and’’ at the end of paragraph (17),
by redesignating paragraph (18) as paragraph (19), and
by inserting after paragraph (17) the following new para-
graph:
‘‘(18) the determination of whether an individ-
ual is an employee of another person shall be made
in accordance with section 3306(i); and’’.
(b) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall take effect on the 180th day after the date of
the enactment of this Act.
(2) SPECIAL RULE.—In the case of any State
the legislature of which has not been in session for
at least 30 calendar days (whether or not successive)
between the date of the enactment of this Act and
such 180th day, the amendments made by this sec-
tion shall take effect 30 calendar days after the 1st