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.
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 Determination Act of 2001’’.
SEC. 2. SAFE HARBOR FOR DETERMINING THAT CERTAIN
INDIVIDUALS ARE NOT EMPLOYEES.
(a) IN GENERAL.—Chapter 25 of the Internal Rev-
enue Code of 1986 (relating to general provisions relating
to employment taxes) is amended by adding after section
3510 the following new section:
‘‘SEC. 3511. SAFE HARBOR FOR DETERMINING THAT CER-
TAIN INDIVIDUALS ARE NOT EMPLOYEES.
‘‘(a) SAFE HARBOR.—
‘‘(1) IN GENERAL.—For purposes of this title,
if the requirements of subsections (b), (c), and (d),
or the requirements of subsections (d) and (e), are
met with respect to any service performed by any in-
dividual, then with respect to such service—
‘‘(A) the service provider shall not be
treated as an employee,
‘‘(B) the service recipient shall not be
treated as an employer,
‘‘(C) the payor shall not be treated as an
employer, and
‘‘(D) compensation paid or received for
such service shall not be treated as paid or re-
ceived with respect to employment.
‘‘(2) AVAILABILITY OF SAFE HARBOR NOT TO
LIMIT APPLICATION OF OTHER LAWS.—Nothing in
this section shall be construed—
‘‘(A) as limiting the ability of a service
provider, service recipient, or payor to apply
other provisions of this title, section 530 of the
Revenue Act of 1978, or the common law in de-
termining whether an individual is not an em-
ployee, or
‘‘(B) as a prerequisite for the application
of any provision of law described in subpara-
graph (A).
‘‘(b) SERVICE PROVIDER REQUIREMENTS WITH RE-
GARD TO THE SERVICE RECIPIENT.—For purposes of sub-
section (a), the requirements of this subsection are met
if the service provider, in connection with performing the
service—
‘‘(1) has the ability to realize a profit or loss,
‘‘(2) agrees to perform services for a particular
amount of time or to complete a specific result or
task, and
‘‘(3) either—
‘‘(A) has a significant investment in assets,
or
‘‘(B) incurs unreimbursed expenses which
are ordinary and necessary to the service pro-
vider’s industry and which represent an amount
equal to at least 2 percent of the service pro-
vider’s gross income attributable to services
performed pursuant to 1 or more contracts de-
scribed in subsection (d).
‘‘(c) ADDITIONAL SERVICE PROVIDER REQUIRE-
MENTS WITH REGARD TO OTHERS.—For the purposes of
subsection (a), the requirements of this subsection are met
if the service provider—
‘‘(1) has a principal place of business,
‘‘(2) does not primarily provide the service at a
single service recipient’s facilities,
‘‘(3) pays a fair market rent for use of the serv-
ice recipient’s facilities, or
‘‘(4) operates primarily from equipment sup-
plied by the service provider.
‘‘(d) WRITTEN DOCUMENT REQUIREMENTS.—For
purposes of subsection (a), the requirements of this sub-
section are met if the services performed by the service
provider are performed pursuant to a written contract be-
tween such service provider and the service recipient, or
the payor, and such contract provides that the service pro-
vider will not be treated as an employee with respect to
such services for Federal tax purposes and that the service
provider is responsible for the provider’s own Federal,
State, and local income taxes, including self-employment
taxes and any other taxes.
‘‘(e) BUSINESS STRUCTURE
AND BENEFITS RE-
QUIREMENTS.—For purposes of subsection (a), the re-
quirements of this subsection are met if the service
provider—
‘‘(1) conducts business as a properly constituted
corporation or limited liability company under appli-
cable State laws, and
‘‘(2) does not receive from the service recipient
or payor any benefits that are provided to employees
of the service recipient.
‘‘(f) 
SPECIAL
RULES.—For 
purposes 
of 
this
section—
‘‘(1) FAILURE TO MEET REPORTING REQUIRE-
MENTS.—If for any taxable year any service recipi-
ent or payor fails to meet the applicable reporting
requirements of section 6041(a) or 6041A(a) with
respect to a service provider, then, unless the failure
is due to reasonable cause and not willful neglect,
the safe harbor provided by this section for deter-
mining whether individuals are not employees shall
not apply to such service recipient or payor with re-
spect to that service provider.
‘‘(2) CORPORATION
AND
LIMITED
LIABILITY
COMPANY SERVICE PROVIDERS.—
‘‘(A) RETURNS
REQUIRED.—If, for any
taxable year, any corporation or limited liability
company fails to file all Federal income and
employment tax returns required under this
title, unless the failure is due to reasonable
cause and not willful neglect, subsection (e)
shall not apply to such corporation or limited li-
ability company.
‘‘(B) RELIANCE BY SERVICE RECIPIENT OR
PAYOR.—If a service recipient or a payor—
‘‘(i) obtains a written statement from
a service provider which states that the
service provider is a properly constituted
corporation or limited liability company,
provides the State (or in the case of a for-
eign entity, the country), and year of, in-
corporation or formation, provides a mail-
ing address, and includes the service pro-
vider’s employer identification number, and
‘‘(ii) makes all payments attributable
to services performed pursuant to 1 or
more contracts described in subsection (d)
to such corporation or limited liability com-
pany,
then the requirements of subsection (e)(1) shall
be deemed to have been satisfied.
‘‘(C) AVAILABILITY OF SAFE HARBOR.—
‘‘(i) IN
GENERAL.—For purposes of
this section, unless otherwise established to
the satisfaction of the Secretary, the num-
ber of covered workers which are not treat-
ed as employees by reason of subsection (e)
for any calendar year shall not exceed the
threshold number for the calendar year.
‘‘(ii) THRESHOLD NUMBER.—For pur-
poses of this paragraph, the term ‘thresh-
old number’ means, for any calendar year,
the greater of (I) 10 covered workers, or
(II) a number equal to 3 percent of cov-
ered workers.
‘‘(iii) COVERED
WORKER.—For pur-
poses of this paragraph, the term ‘covered
worker’ means an individual for whom the
service recipient or payor paid employment
taxes under subtitle C in all 4 quarters of
the preceding calendar year.
‘‘(3) BURDEN
OF
PROOF.—For purposes of
subsection (a), if—
‘‘(A) a service provider, service recipient,
or payor establishes a prima facie case that it
was reasonable not to treat a service provider
as an employee for purposes of this section, and
‘‘(B) the service provider, service recipient,
or payor has fully cooperated with reasonable
requests from the Secretary or his delegate,
then the burden of proof with respect to such treat-
ment shall be on the Secretary.
‘‘(4) RELATED ENTITIES.—If the service pro-
vider is performing services through an entity owned
in whole or in part by such service provider, the ref-
erences to service provider in subsections (b)
through (e) shall include such entity if the written
contract referred to in subsection (d) is with such
entity.
‘‘(g) DETERMINATIONS BY THE SECRETARY.—For
purposes of this title—
‘‘(1) IN GENERAL.—
‘‘(A) DETERMINATIONS WITH RESPECT TO
A SERVICE RECIPIENT OR A PAYOR.—A deter-
mination by the Secretary that a service recipi-
ent or a payor should have treated a service
provider as an employee shall be effective no
earlier than the notice date if—
‘‘(i) the service recipient or the payor
entered into a written contract satisfying
the requirements of subsection (d),
‘‘(ii) the service recipient or the payor
satisfied the applicable reporting require-
ments of section 6041(a) or 6041A(a) for
all taxable years covered by the contract
described in clause (i), and
‘‘(iii) the service recipient or the payor
demonstrates a reasonable basis for deter-
mining that the service provider is not an
employee and that such determination was
made in good faith.
‘‘(B) DETERMINATIONS WITH RESPECT TO
A SERVICE PROVIDER.—A determination by the
Secretary that a service provider should have
been treated as an employee shall be effective
no earlier than the notice date if—
‘‘(i) the service provider entered into a
contract satisfying the requirements of
subsection (d),
‘‘(ii) the service provider satisfied the
applicable reporting requirements of sec-
tions 6012(a) and 6017 for all taxable
years covered by the contract described in
clause (i), and
‘‘(iii) 
the 
service 
provider 
dem-
onstrates a reasonable basis for deter-
mining that the service provider is not an
employee and that such determination was
made in good faith.
‘‘(C) REASONABLE
CAUSE
EXCEPTION.—
The requirements of subparagraph (A)(ii) or
(B)(ii) shall be treated as being met if the fail-
ure to satisfy the applicable reporting require-
ments is due to reasonable cause and not willful
neglect.
‘‘(2) CONSTRUCTION.—Nothing in this sub-
section shall be construed as limiting any provision
of law that provides an opportunity for administra-
tive or judicial review of a determination by the Sec-
retary.
‘‘(3) NOTICE DATE.—For purposes of this sub-
section, the notice date is the 30th day after the ear-
lier of—
‘‘(A) the date on which the first letter of
proposed deficiency that allows the service pro-
vider, the service recipient, or the payor an op-
portunity for administrative review in the Inter-
nal Revenue Service Office of Appeals is sent,
or
‘‘(B) the date on which the deficiency no-
tice under section 6212 is sent.
‘‘(h) DEFINITIONS.—For the purposes of this
section—
‘‘(1) SERVICE
PROVIDER.—The term ‘service
provider’ means any individual who performs a serv-
ice for another person.
‘‘(2) SERVICE RECIPIENT.—Except as provided
in paragraph (4), the term ‘service recipient’ means
the person for whom the service provider performs
such service.
‘‘(3) PAYOR.—Except as provided in paragraph
(4), the term ‘payor’ means the person who pays the
service provider for the performance of such service
in the event that the service recipient does not pay
the service provider.
‘‘(4) EXCEPTIONS.—The terms ‘service recipi-
ent’ and ‘payor’ do not include any entity in which
the service provider owns in excess of 5 percent of—
‘‘(A) in the case of a corporation, the total
combined voting power of stock in the corpora-
tion, or
‘‘(B) in the case of an entity other than a
corporation, the profits or beneficial interests in
the entity.
‘‘(5) IN CONNECTION WITH PERFORMING THE
SERVICE.—The term ‘in connection with performing
the service’ means in connection or related to the op-
eration of the service provider’s trade or business.
‘‘(6) PRINCIPAL
PLACE
OF
BUSINESS.—For
purposes of subsection (c), the term ‘principal place
of business’ has the same meaning as under section
280A(c)(1).
‘‘(7) FAIR MARKET RENT.—The term ‘fair mar-
ket rent’ means a periodic, fixed minimum rental fee
which is based on the fair rental value of the facili-
ties and is established pursuant to a written contract
with terms similar to those offered to unrelated per-
sons for facilities of similar type and quality.’’.
(b) REPEAL OF SECTION 530(d) OF THE REVENUE
ACT OF 1978.—Section 530(d) of the Revenue Act of
1978 (as added by section 1706 of the Tax Reform Act
of 1986) is repealed.
(c) CLERICAL AMENDMENT.—The table of sections
for chapter 25 of the Internal Revenue Code of 1986 is
amended by adding at the end the following new item:
‘‘Sec. 3511. Safe harbor for determining that certain individuals
are not employees.’’
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to services performed after
the date of the enactment of this Act.
(2) DETERMINATIONS BY THE SECRETARY.—
Section 3511(g) of the Internal Revenue Code of
1986 (as added by subsection (a)) shall apply to de-
terminations after the date of the enactment of this
Act.
(3) SECTION 530(d).—The amendment made by
subsection (b) shall apply to periods ending after the
date of the enactment of this Act.
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