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 re-
ferred 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 em-
ployment tax reclassifications.
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 ‘‘Independent Con-
tractor Clarification Act of 1999’’.
SEC. 2. DETERMINATION OF EMPLOYEE AND EMPLOYER
STATUS.
(a) IN GENERAL.—Subsection (c) of section 7701 of
the Internal Revenue Code of 1986 is amended to read
as follows:
‘‘(c) EMPLOYEE AND EMPLOYER.—
‘‘(1) IN GENERAL.—For purposes of this title,
except as otherwise expressly provided in this title—
‘‘(A) an individual (hereinafter in this sub-
section referred to as the ‘service provider’) per-
forming services for another person (hereinafter
in this subsection referred to as the ‘service re-
cipient’) shall be treated as an employee of the
service recipient, and
‘‘(B) the service recipient shall be treated
as the employer of such service provider,
unless the requirements of each of the subpara-
graphs of paragraph (3) have been satisfied.
‘‘(2) REPEAL OF COMMON LAW TESTS.—The
rules of this subsection shall apply in lieu of any
common law rules which would otherwise apply.
‘‘(3) REQUIREMENTS.—
‘‘(A) LACK OF CONTROL BY SERVICE RE-
CIPIENT.—The requirements of this subpara-
graph are met only if the service provider has
the right, to the exclusion of the service recipi-
ent, to control and direct the manner of, and
the means used in, the service provider’s per-
formance of services for the service recipient.
‘‘(B) AVAILABILITY OF SERVICE TO OTH-
ERS.—The requirements of this subparagraph
are met only if the service provider—
‘‘(i) makes substantially similar serv-
ices available to others, and
‘‘(ii) is not precluded by the service
recipient from soliciting business opportu-
nities that involve providing substantially
similar services for other persons during
the period that the service provider is pro-
viding services for the service recipient.
‘‘(C) ENTREPRENEURIAL
RISK.—The re-
quirements of this subparagraph are met only
if—
‘‘(i) in the service provider’s overall
business activities, the service provider has
the potential to generate profit and bears
risk of loss and the extent to which profit
is generated or loss is sustained depends
on the service provider’s efforts and deci-
sions other than as to the amount of work
performed, and
‘‘(ii) in the event the service provider
fails to perform the work in accordance
with the service recipient’s requirements,
the service provider is either subject to li-
ability to the service recipient for damages
arising from claims sounding in contract or
would be subject to such liability but for a
waiver by the service recipient.
‘‘(4) PERSON.—For purposes of this subsection,
the term ‘person’ includes any governmental unit
(and any agency or instrumentality thereof).’’
(b) REPEAL OF SECTION 530 OF REVENUE ACT OF
1978.—Section 530 of the Revenue Act of 1978 is hereby
repealed.
(c) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 3121(d) of such
Code is amended to read as follows:
‘‘(2) any individual who is treated as an em-
ployee under section 7701(c); or’’.
(2) Paragraph (2) of section 210(j) of the So-
cial Security Act is amended to read as follows:
‘‘(2) any individual who is treated as an em-
ployee under section 7701(c) of the Internal Rev-
enue Code of 1986; or’’.
(3) Subsection (a) of section 7701 of such Code
is amended by inserting after paragraph (33) the
following new paragraph:
‘‘(34) INCLUDES AND INCLUDING.—The terms
‘includes’ and ‘including’ when used in a definition
contained in this title shall not be deemed to exclude
other things otherwise within the meaning of the
term defined.’’
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to services performed after December 31,
2000.
(2) REPEAL OF LIMITATIONS ON REGULATIONS
AND RULINGS.—The repeal made by subsection (b),
insofar as it relates to section 530(b) of the Revenue
Act of 1978, shall take effect on the date of the en-
actment of this Act; except that regulations and
Revenue Rulings permitted to be issued by reason of
such repeal may not apply to services performed be-
fore January 1, 2001.
SEC. 3. LIMITATIONS ON RETROACTIVE EMPLOYMENT TAX
RECLASSIFICATIONS.
(a) GENERAL RULE.—Chapter 25 of the Internal
Revenue Code of 1986 (relating to general provisions ap-
plicable to employment taxes) is amended by adding at
the end the following new section:
‘‘SEC. 3511. LIMITATIONS ON RETROACTIVE EMPLOYMENT
TAX RECLASSIFICATIONS.
‘‘(a) GENERAL RULE.—If—
‘‘(1) for purposes of employment taxes, the tax-
payer treats an individual as not being an employee
for any period after December 31, 2000, and
‘‘(2) for such period, the taxpayer meets—
‘‘(A) the consistency requirements of sub-
section (b),
‘‘(B) the return filing requirements of sub-
section (c), and
‘‘(C) the safe harbor requirement of sub-
section (d),
for purposes of applying this subtitle for such period, the
individual shall be deemed not to be an employee of the
taxpayer for such period. The preceding sentence shall
cease to apply to periods beginning more than 60 days
after the date that the Secretary notifies the taxpayer in
writing of a final administrative determination that the
taxpayer should treat such individual (or any individual
holding a substantially similar position) as an employee.
‘‘(b) CONSISTENCY
REQUIREMENTS.—A taxpayer
meets the consistency requirements of this subsection with
respect to any individual for any period if the taxpayer
treats such individual (and all other individuals holding
substantially similar positions) as not being an employee
for purposes of the employment taxes for such period and
all prior periods after December 31, 1978.
‘‘(c) RETURN FILING REQUIREMENTS.—The tax-
payer meets the return filing requirements of this sub-
section with respect to any individual for any period if all
Federal tax returns (including information returns) re-
quired to be filed by the taxpayer for such period with
respect to such individual are filed on a basis consistent
with the taxpayer’s treatment of such individual as not
being an employee.
‘‘(d) SAFE HARBORS.—
‘‘(1) IN
GENERAL.—The taxpayer meets the
safe harbor requirement of this subsection with re-
spect to any individual for any period if the taxpayer
establishes that its treatment of such individual as
not being an employee for such period was—
‘‘(A) in reasonable reliance on a written
determination 
(as 
defined 
in 
section
6110(b)(1)) issued to the taxpayer that ad-
dressed the employment status of the individual
or an individual holding a substantially similar
position with the taxpayer;
‘‘(B) in reasonable reliance on a concluded
Internal Revenue Service audit of the taxpayer
in which the employment status of the indi-
vidual or any individual holding a substantially
similar position with the taxpayer was examined
and the taxpayer was notified in writing that no
change would be made to such individual’s em-
ployment status; or
‘‘(C) supported by substantial authority.
For purposes of subparagraph (C), the term ‘sub-
stantial authority’ has the same meaning as when
used in section 6662(d)(2)(B)(i); except that such
term shall not include (i) any private letter ruling
issued to a person other than the taxpayer, and (ii)
any authority that does not address the employment
status of individuals holding positions substantially
similar to that of the individual.
‘‘(2) SPECIAL RULES.—
‘‘(A) APPLICATION
TO
PRE-2001
DETER-
MINATIONS, ETC.—Paragraph (1) shall apply
without regard to whether the determination,
audit, or the authority referred to therein was
before January 1, 2001.
‘‘(B) SUBSEQUENT AUTHORITY.—The tax-
payer shall not be considered to meet the safe
harbor requirement of paragraph (1) with re-
spect to any individual for any period if the
treatment of such individual as not being an
employee is inconsistent with any regulation,
Revenue Ruling, Revenue Procedure, or other
authority—
‘‘(i) which is published by the Sec-
retary at least 60 days before the begin-
ning of such period and after the date of
the determination, the conclusion of the
audit, or the substantial authority referred
to in paragraph (1), and
‘‘(ii) which applies to the type of serv-
ices performed by such individual or the
industry or business in which such services
are performed.
‘‘(3) TRANSITIONAL RULE.—Except as provided
in paragraph (2)(B), the taxpayer shall be consid-
ered to meet the safe harbor requirement of para-
graph (1) with respect to services performed by an
individual during 2001 or 2002 if the taxpayer
would be treated under section 530 of the Revenue
Act of 1978 (as in effect on the day before the date
of the enactment of this section) as having a reason-
able basis for not treating such individual as an em-
ployee.
‘‘(e) OTHER SPECIAL RULES.—
‘‘(1) NOTICE.—An officer or employee of the
Internal Revenue Service shall, before or at the com-
mencement of any audit inquiry relating to the em-
ployment status of one or more individuals who per-
form services for the taxpayer, provide the taxpayer
with a written notice of the provisions of this sec-
tion.
‘‘(2) AVAILABILITY OF SAFE HARBORS.—Noth-
ing in this section shall be construed to provide that
this section only applies where the individual in-
volved is otherwise an employee of the taxpayer.
‘‘(f) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) EMPLOYMENT
TAX.—The term ‘employ-
ment tax’ means any tax imposed by this subtitle.
‘‘(2) EMPLOYMENT
STATUS.—The term ‘em-
ployment status’ means the status of an individual
as an employee or as an independent contractor (or
other individual who is not an employee).
‘‘(3) TAXPAYER.—The term ‘taxpayer’ includes
any person or entity (including a governmental enti-
ty) which is (or would be but for this section) liable
for any employment tax. Such term includes any
predecessor or successor to the taxpayer.
‘‘(4) SUBSTANTIALLY SIMILAR POSITION.—The
determination as to whether an individual holds a
position substantially similar to a position held by
another individual shall include consideration of the
relationship between the taxpayer and such individ-
uals.
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be appropriate to carry out the
purposes of this section.’’
(b) CLERICAL AMENDMENT.—The table of sections
for chapter 25 of such Code is amended by adding at the
end the following new item:
‘‘Sec. 3511. Limitations on retroactive employment tax reclassi-
fications.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to all periods beginning after De-
cember 31, 2000.
SEC. 4. STATUTE OF LIMITATIONS ON ASSESSMENT OF EM-
PLOYMENT TAXES TO RUN BEGINNING ON
DATE 
CERTAIN 
INFORMATION 
RETURNS
FILED.
(a) IN GENERAL.—Subsection (b) of section 6501 of
the Internal Revenue Code of 1986 (relating to limitations
on assessment and collection) is amended by adding at the
end the following new paragraph:
‘‘(5) CERTAIN
INFORMATION
RETURNS
TO
BEGIN
LIMITATION
PERIODS
ON
EMPLOYMENT
TAXES.—For purposes of this section, if—
‘‘(A) a return is filed under section 6041
or 6041A which specifies an amount of pay-
ments made to any individual for services per-
formed by such individual, and
‘‘(B) such payments are not taken into ac-
count in determining the taxes imposed by
chapters 21 and 24,
then, notwithstanding the last sentence of subsection
(a), such return shall be treated as the return re-
ferred to in subsection (a) for purposes of deter-
mining the period of limitations with respect to such
taxes on such services.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to payments made after December
31, 2000.
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