Standards for determining employment status

(a)

In general

Chapter 25 of the Internal Revenue Code of 1986 (general provisions relating to employment taxes) is amended by adding after section 3510 the following new sections:

3511.

Controversies involving whether individuals are employees for purposes of the employment taxes

(a)

Termination of certain employment tax liability

(1)

In general

If— (A)for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, and (B)in the case of periods after December 31, 1978, all returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee,

then, for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.

(2)

Statutory standards providing one method of satisfying the requirements of paragraph (1)

For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer’s treatment of such individual for such period was in reasonable reliance on any of the following— (A)judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer, (B)a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual, or (C)long-standing recognized practice of a significant segment of the industry in which such individual was engaged. (3)

Consistency required in the case of prior tax treatment

Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for any period ending after December 31, 2012, if the taxpayer (or a predecessor) has treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 2011. (4)

Refund or credit of overpayment

If refund or credit of any overpayment of an employment tax resulting from the application of paragraph (1) is not barred on the date of the enactment of this section by any law or rule of law, the period for filing a claim for refund or credit of such overpayment (to the extent attributable to the application of paragraph (1)) shall not expire before the date 1 year after the date of the enactment of this section. (b)

Prohibition against regulations and rulings on employment status

Except for purposes of providing Revenue Rulings with respect to section 3512, no regulation or Revenue Ruling shall be published on or after the date of the enactment of this section by the Department of the Treasury (including the Internal Revenue Service) with respect to the employment status of any individual for purposes of the employment taxes. (c)

Definitions

For purposes of this section— (1)

Employment tax

The term employment tax means any tax imposed by this subtitle. (2)

Employment status

The term employment status means the status of an individual, under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee). (d)

Exception

This section shall not apply in the case of an individual who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. (e)

Special rules for application of section

(1)

Notice of availability of section

An officer or employee of the Internal Revenue Service shall, before or at the commencement of any audit inquiry relating to the employment status of one or more individuals who perform services for the taxpayer, provide the taxpayer with a written notice of the provisions of this section. (2)

Rules relating to statutory standards

For purposes of subsection (a)(2)— (A)a taxpayer may not rely on an audit commenced after December 31, 1996, for purposes of subparagraph (B) thereof unless such audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer, (B)in no event shall the significant segment requirement of subparagraph (C) thereof be construed to require a reasonable showing of the practice of more than 25 percent of the industry (determined by not taking into account the taxpayer), and (C)in applying the long-standing recognized practice requirement of subparagraph (C) thereof— (i)such requirement shall not be construed as requiring the practice to have continued for more than 10 years, and (ii)a practice shall not fail to be treated as long-standing merely because such practice began after 1978. (3)

Availability of safe harbors

Nothing in this section shall be construed to provide that subsection (a) only applies where the individual involved is otherwise an employee of the taxpayer. (4)

Burden of proof

(A)

In general

If— (i)a taxpayer establishes a prima facie case that it was reasonable not to treat an individual as an employee for purposes of this section, and (ii)the taxpayer has fully cooperated with reasonable requests from the Secretary of the Treasury or his delegate,

then the burden of proof with respect to such treatment shall be on the Secretary.

(B)

Exception for other reasonable basis

In the case of any issue involving whether the taxpayer had a reasonable basis not to treat an individual as an employee for purposes of this section, subparagraph (A) shall only apply for purposes of determining whether the taxpayer meets the requirements of subparagraph (A), (B), or (C) of subsection (a)(2). (5)

Preservation of prior period safe harbor

If— (A)an individual would (but for the treatment referred to in subparagraph (B)) be deemed not to be an employee of the taxpayer under subsection (a) for any prior period, and (B)such individual is treated by the taxpayer as an employee for employment tax purposes for any subsequent period,

then, for purposes of applying such taxes for such prior period with respect to the taxpayer, the individual shall be deemed not to be an employee.

(6)

Substantially similar position

For purposes of this section, 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 individuals.

3512.

Safe harbor standards for determining employment status

(a)

General rule

For purposes of this title, if the requirements of subsection (c) are met with respect to any service performed by any service provider, then with respect to such service— (1)the service provider shall not be treated as an employee, (2)the service recipient shall not be treated as an employer, (3)the payor shall not be treated as an employer, and (4)compensation paid or received for such service shall not be treated as paid or received with respect to employment. (b)

Statutory employees

Nothing in this section shall supersede the categories of employees described in section 3121(d)(3). (c)

Requirements

(1)

In general

The requirements of this subsection are met if the requirements of paragraphs (2) and (3) are met. (2)

Investment or income fluctuation

A service provider meets the requirements of this paragraph if the service provider— (A)incurs significant financial responsibility for providing and maintaining the necessary equipment and facilities to perform the work outlined in their qualified agreement, and (B)either— (i)incurs unreimbursed expenses, or (ii)risks income fluctuations because the remuneration with respect to such service is directly related to sales or other output rather than solely to the number of hours actually worked or expenses incurred. (3)

Control of time worked and performance of services

A service provider meets the requirements of this paragraph if the service provider— (A)is compensated upon factors related to the work performed, such as a percentage of revenue or scheduled rates, and not solely on the basis of hours or time expended, and (B)substantially controls the means and manner of performing the services, in conformance with regulatory requirements, the specifications of the service recipient or payor and any additional requirements specified in the qualified agreement. (d)

Definitions

For the purposes of this section— (1)

Service provider

The term service provider means any individual or entity that performs service for another company under a qualified agreement. (2)

Service recipient

The term service recipient means the person or entity for whom the service provider performs such service. (3)

Payor

The term payor means the person or entity that pays the service provider for the performance of such service in the event that the service recipients do not pay the service provider. (4)

Exceptions

The terms service recipient and payor do not include any entity which is owned in whole or in part by the service provider. (5)

Qualified agreement

The term qualified agreement means a written contract between a service provider and the service recipient for whom the services are performed or the payor that provides that the service provider— (A)will not be treated as an employee with respect to such services for the purpose of this title, and (B)has been informed of the Federal tax obligations resulting from such treatment.

(b)

Conforming amendments

(1)Section 530 of the Revenue Act of 1978 is hereby repealed. (2)The table of sections for chapter 25 of such Code is amended by adding at the end the following new items:

Sec. 3511. Controversies involving whether individuals are employees for purposes of the employment taxes.

Sec. 3512. Safe harbor standards for determining employment status.

(c)

Effective dates

(1)

In general

Except as provided in paragraph (2), the amendments made by this Act shall take effect beginning on the first day of the first calendar year beginning after the date of enactment of this Act. (2)

Repeal of section 530

The amendment made by subsection (b)(1) shall apply to periods in calendar years beginning after the date of enactment of this Act.