[Congressional Record Volume 143, Number 35 (Tuesday, March 18, 1997)]
[Senate]
[Pages S2429-S2434]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BOND (for himself, Ms. Snowe, Mr. Nickles, Mr. Burns, Mr. 
        Warner, Mr. Faircloth, Mr. Murkowski, Mr. Inhofe, Mr. Enzi, Mr. 
        Hutchinson, Mr. Mack, Ms. Mikulski and Mr. Grams):
  S. 460. A bill to amend the Internal Revenue Code of 1986 to increase 
the deduction for health insurance costs of self-employed individuals, 
to provide clarification for the deductibility of expenses incurred by 
a taxpayer in connection with the business use of the home, to clarify 
the standards used for determining that certain individuals are not 
employees, and for other purposes; to the Committee on Finance.


              THE HOME-BASED BUSINESS FAIRNESS ACT OF 1997

  Mr. BOND. Mr. President, home-based businesses are a significant and 
often overlooked part of this country's economy. Some people may be 
surprised to learn that over 9 million men and women in this country 
now operate home-based businesses, and over 14 million individuals earn 
income through home-based businesses. Even more impressive is the fact 
that a majority of these enterprises are owned by women, and the Small 
Business Administration estimates that women in this country are 
starting over 300,000 new home-based businesses each year.

  There are a number of reasons for the explosive growth of home-based 
businesses. Recent innovations in computer and communication technology 
have made the virtual office a reality and allow many Americans to 
compete in marketplaces that a few years ago required huge investments 
in equipment and personnel. In addition, many men and women in this 
country turn to home-based business in an effort to spend more time 
with their children. By working at home, these families can bring in 
two incomes, while avoiding the added time and expense of day-care and 
commuting. Corporate down-sizing, too, contributes to the growth in 
this sector as many skilled individuals convert their knowledge and 
experience from corporate life into successful enterprises operated 
from their homes.
  The rewards of owning a home-based business are also numerous. The 
added independence and self-reliance of having your own business 
provides not only economic rewards but also personal satisfaction. You 
are the boss: you set your own hours, develop your own business plans, 
and choose your customers and clients. In many ways, home-based 
businesses provide the greatest avenue for the entrepreneurial spirit, 
which has long been the driving force behind the success of this 
country.
  But with these rewards comes a number of obstacles, not the least of 
which are regulations and burdens imposed by the Federal Government. In 
fact, the tax laws, and in particular the IRS, are frequently cited as 
the most significant problems for home-based businesses today. Changes 
in tax policy must be considered by this Congress to ensure that our 
laws do not stall the growth and development of this successful sector 
of our economy.
  Mr. President, in answer to this call for help, I am introducing 
today the Home-Based Business Fairness Act of 1997. This legislation is 
the product of extensive input from actual home-based business owners 
and the efforts of my colleagues Senators Olympia Snowe and Don 
Nickles. The bill is designed to address three tax issues that 
currently pose significant problems for home-based businesses.


     deductibility of health-insurance costs for the self-employed

  First, the bill addresses the deductibility of health-insurance costs 
for the self-employed. During the 104th Congress, we made significant 
progress in this area. First, we made the deduction permanent after 
years of uncertainty. Then, last summer, we passed legislation that 
will increase the deduction for these health-care costs to 80 percent 
incrementally by 2006. While I fully supported that increase, the self-
employed cannot wait 10 years for partial deductibility when their 
large corporate competitors can fully deduct such costs today.
  With the self-employed able to deduct only 40 percent of their 
health-insurance costs today, it comes as no surprise that nearly a 
quarter of the self-employed, many of whom operate home-based 
businesses, do not have health insurance. In fact, 4 million households 
in this country headed by a self-employed individual do not have health 
insurance.
  In order to make it easier for home-based business owners and their 
families to have health insurance, we must level this playing field. My 
bill will increase the deductibility of health insurance for the self-
employed to 100 percent beginning this year. A full deduction will make 
health insurance more affordable to home-based business owners and help 
them and their families get the health insurance coverage that they 
need and deserve.


                         home-office deduction

  Second, the Home-Based Business Fairness Act will restore the home-
office deduction and further level the playing field for home-based 
businesses. After the Supreme Court's 1993 Soliman decision, the only 
home-based businesses that can deduct the costs associated with their 
home office are those that see their clients in the home and that 
generate their income within the home office. That narrow 
interpretation of the law denies the home-office deduction to service 
providers like construction contractors, landscaping professionals, and 
sales representatives, who must by necessity perform their services 
outside of the home.

  It is patently unfair to prevent these individuals from deducting 
their utility costs, property taxes, and other expenses related to the 
home office, when they could do so if they rented an office separate 
from the home. I thank my colleague from Utah, Senator Hatch, for his 
willingness to allow us to work together on this issue. My bill 
incorporates the legislation that Senator Hatch introduced earlier this 
month and will permit a home office to include one where the individual 
performs his essential administrative and management activities such a 
billing and record keeping. In order to qualify for the deduction, the 
bill requires that the business owner perform these activities on a 
regular, on-going, and nonincidental basis and have no other office in 
which to perform them.
  The restoration of the home-office deduction for home-based 
businesses not only puts them on an equal footing with their larger 
competitors, but also frees important capital that can be used to 
expand the business. For too long home-based businesses have lived with 
the fear of an IRS audit fueled by the Soliman decision. It is time to 
eliminate this obstacle to the continued success of these important 
entrepreneurs.


             Clarification of Independent-Contractor Status

  The final element of the Home-Based Business Fairness Act is relief 
for entrepreneurs seeking to be treated as independent contractors and 
for businesses needing to hire independent contractors. As the chairman 
of the Small Business Committee, I have heard from countless small 
business owners who are caught in the environment of fear and confusion 
that now surrounds the classification of workers. This situation is 
stifling the entrepreneurial spirit of many small business owners who 
find that they do not have the flexibility to conduct their businesses 
in a manner that makes the best economic

[[Page S2430]]

sense and that serves their personal and family goals.
  Mr. President, the root of this problem is found in the IRS' test for 
determining whether a worker is an independent contractor or an 
employee. Over the past three decades, the IRS has relied on a 20-
factor test based on the common law to make this determination. On 
first blush, a 20-factor test sounds like a reasonable approach: if a 
taxpayer demonstrates a majority of the factors, he or she is an 
independent contractor. Not surprisingly, the IRS' test is not that 
simple. It is a complex set of extremely subjective criteria with no 
clear weight assigned to any of the factors. As a result, a small 
business taxpayer is not able to predict which of the 20 factors will 
be most important to a particular IRS agent, and finding a certain 
number of these factors in any given case does not guarantee the 
outcome.
  To make matters worse, the IRS' determination inevitably occurs 2 or 
3 years after the parties have determined in good faith that they have 
an independent-contractor relationship. And the consequences can be 
devastating. The business recipient of the services is forced to 
reclassify the independent contractor as an employee and must pay the 
payroll taxes the IRS says should have been collected in the prior 
years. Interest and penalties are also added on. The result for many 
small businesses is a tax bill that bankrupts the company. And that's 
not the end of the story. The IRS then goes after the service provider, 
who is now classified as an employee, and disallows a portion of his 
business expenses--again resulting in additional taxes, interest, and 
penalties.
  Mr. President, all of us in this body recognize that the IRS is 
charged with the duty of collecting Federal revenues and enforcing the 
tax laws. The problem in this case is that the IRS is using a procedure 
that is patently unfair and is doing so on an increasingly frequent 
basis. Between 1988 and 1994, the IRS' use of the 20-factor test 
resulted in some 11,000 audits, 483,000 worker reclassifications, and 
$751 million in back taxes and penalties. These facts make me wonder 
whether the IRS is using this test as a de facto source of enhanced 
revenue collection when the classification decision does not alter the 
aggregate tax liability to the Federal Government at all.
  For its part, the IRS has just released its revised worker 
classification training manual. In the Commissioner's accompanying 
memo, she describes the manual as an ``attempt to identify, simplify, 
and clarify the relevant facts that should be evaluated in order to 
accurately determine worker classification. . . .'' There can be no 
more compelling reason for immediate action on this issue. The revised 
manual is over 150 pages--even longer than the original draft. If it 
takes this many pages to teach revenue agents how to simplify and 
clarify this small business tax issue, I think we can be fairly sure 
how simple and clear it is going to seem to the taxpayer who tries to 
figure it out on his own.

  The Home-Based Business Fairness Act removes the need for so many 
pages of instruction on the 20-factor test by establishing a clear safe 
harbor based on objective criteria. Under these criteria, if there is a 
written agreement between the parties, and if an individual 
demonstrates economic independence and independence with respect to the 
workplace, he will be treated as an independent contractor rather than 
an employee. And the service recipient will not be treated as an 
employer. In addition, individuals who perform services through their 
own corporations will also qualify for the safe harbor as long as there 
is a written agreement and the individuals provide for their own 
benefits.
  The safe harbor is simple, straightforward, and final. To take 
advantage of it, payments above $600 per year to an individual service 
provider must be reported to the IRS, just as is required under current 
law. This will help ensure that taxes properly due to the Treasury will 
continue to be collected.
  Mr. President, the IRS contends that there are millions of 
independent contractors who should be classified as employees, which 
costs the Federal Government billions of dollars a year. This assertion 
is plainly incorrect. Classification of a worker has no cost to the 
Government. What costs the Government are taxpayers who do not pay 
their taxes. My bill has two requirements that I believe will improve 
compliance among independent contractors using the safe harbor. First, 
there must be a written agreement between the parties--this will help 
the independent contractor know from the beginning that he is 
responsible for his own tax payments. Second, the safe harbor will not 
apply if the service recipient does not comply with the reporting 
requirements and issue 1099's to individuals who perform services.
  My bill also provides relief for businesses and independent 
contractors when the IRS determines that a worker was misclassified. 
Under the bill, if the business and the independent contractor have a 
written agreement, if the applicable reporting requirements were met, 
and if there was a reasonable basis for the parties to believe that the 
worker is an independent contractor, then any IRS reclassification 
upheld in court will only apply prospectively. This provision gives 
important peace of mind to small businesses that act in good faith by 
removing the unpredictable threat of retroactive reclassification and 
substantial interest and penalties.
  A final provision of this legislation, Mr. President, is the repeal 
of section 1706 of the 1986 Tax Reform Act. This provision effectively 
barred an entire group of independent contractors from the protection 
available in section 530 of the Revenue Act of 1978. When section 1706 
was enacted, its proponents argued that technical service workers--such 
as engineers, designers, and computer programmers--were less compliant 
in paying their taxes. Later examination of this issue by the Treasury 
Department found that technical service workers are in fact more likely 
to pay their taxes than most other types of independent contractors. 
This revelation underscores the need to repeal section 1706 and level 
the playing field for individuals in these professions. In the 104th 
Congress, proposals to repeal section 1706 enjoyed wide bi-partisan 
support, and it is my hope that the 105th Congress will finally act on 
this proposal to restore equality for these professionals.
  Mr. President, the importance of adding clarity to the independent-
contractor situation is underscored by the fact that the 2,000 
delegates to the 1995 White House Conference on Small Business voted to 
designate it as their top priority. At that conference, IRS 
Commissioner Richardson noted that either classification--independent 
contractor or employee--can be a valid and appropriate business choice 
as long as the individual pays his taxes. This conclusion was later 
affirmed in the IRS' new worker classification training manual. It is 
time that the law reflect this conclusion and allow small businesses to 
hire employees or independent contractors as their business needs 
demand, without the fear and uncertainty that now prevails.
  The Home-Based Business Fairness Act is a common-sense measure that 
will provide tax fairness for the increasing number of individuals who 
operate their businesses from home and contribute so significantly to 
the strength of our economy. These business owners have waited far too 
long. I urge the members of the Finance Committee to work with Senator 
Nickles and to report out a bill that provides these three much needed 
changes in the tax law so that we do not keep them waiting any longer.
  Mr. President, I ask unanimous consent that additional material be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 460

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Home-Based Business Fairness 
     Act of 1997''.

     SEC. 2. DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED 
                   INDIVIDUALS INCREASED.

       (a) In General.--Section 162(l)(1) of the Internal Revenue 
     Code of 1986 (relating to special rules for health insurance 
     costs of self-employed individuals) is amended to read as 
     follows:
       ``(1) Allowance of deduction.--In the case of an individual 
     who is an employee within the meaning of section 401(c)(1), 
     there shall be allowed as a deduction under this section an 
     amount equal to the amount paid during

[[Page S2431]]

     the taxable year for insurance which constitutes medical care 
     for the taxpayer, the taxpayer's spouse, and dependents.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 3. CLARIFICATION OF DEFINITION OF PRINCIPAL PLACE OF 
                   BUSINESS.

       (a) In General.--Subsection (f) of section 280A of the 
     Internal Revenue Code of 1986 (relating to definitions and 
     special rules) is amended by redesignating paragraphs (2), 
     (3), and (4) as paragraphs (3), (4), and (5), respectively, 
     and by inserting after paragraph (1) the following new 
     paragraph:
       ``(2) Principal place of business.--For purposes of 
     subsection (c), a home office shall in any case qualify as 
     the principal place of business if--
       ``(A) the office is the location where the taxpayer's 
     essential administrative or management activities are 
     conducted on a regular and systematic (and not incidental) 
     basis by the taxpayer, and
       ``(B) the office is necessary because the taxpayer has no 
     other location for the performance of the essential 
     administrative or management activities of the business.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1996.

     SEC. 4. SAFE HARBOR FOR DETERMINING THAT CERTAIN INDIVIDUALS 
                   ARE NOT EMPLOYEES.

       (a) In General.--Chapter 25 of the Internal Revenue 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 CERTAIN 
                   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 individual, 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 received 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 applicable 
     provisions of this title, section 530 of the Revenue Act of 
     1978, or the common law in determining whether an individual 
     is not an employee, or
       ``(B) as a prerequisite for the application of any 
     provision of law described in subparagraph (A).
       ``(b) Service Provider Requirements With Regard to the 
     Service Recipient.--For purposes of subsection (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) incurs unreimbursed expenses which are ordinary and 
     necessary to the service provider's industry and which 
     represent an amount at least equal to 2 percent of the 
     service provider's adjusted gross income attributable to 
     services performed pursuant to 1 or more contracts described 
     in subsection (d), and
       ``(3) agrees to perform services for a particular amount of 
     time or to complete a specific result or task.
       ``(c) Additional Service Provider Requirements 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 service 
     recipient's facilities, or
       ``(4) operates primarily with equipment not supplied by the 
     service recipient.
       ``(d) Written Document Requirements.--For purposes of 
     subsection (a), the requirements of this subsection are met 
     if the services performed by the service provider are 
     performed pursuant to a written contract between such service 
     provider and the service recipient, or the payor, and such 
     contract provides that the service provider will not be 
     treated as an employee with respect to such services for 
     Federal tax purposes.
       ``(e) Business Structure and Benefits Requirement.--For 
     purposes of subsection (a), the requirements of this 
     subsection are met if the service provider--
       ``(1) conducts business as a properly constituted 
     corporation or limited liability company under applicable 
     State laws, and
       ``(2) does not receive from the service recipient or payor 
     benefits that are provided to employees of the service 
     recipient.
       ``(f) Special Rules.--For purposes of this section--
       ``(1) Failure to meet reporting requirements.--If for any 
     taxable year any service recipient 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 determining 
     whether individuals are not employees shall not apply to such 
     service recipient or payor with respect to that service 
     provider.
       ``(2) 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 treatment shall 
     be on the Secretary.
       ``(3) Related entities.--If the service provider is 
     performing services through an entity owned in whole or in 
     part by such service provider, the references to `service 
     provider' in subsections (b) through (e) may include such 
     entity, provided that 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 determination by the Secretary that a service 
     recipient 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 requirements of section 6041(a) or 
     6041A(a) for all taxable years covered by the agreement 
     described in clause (i), and
       ``(iii) the service recipient or the payor demonstrates a 
     reasonable basis for determining 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 sections 6012(a) and 6017 for all 
     taxable years covered by the agreement described in clause 
     (i), and
       ``(iii) the service provider demonstrates a reasonable 
     basis for determining 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 failure to satisfy the applicable reporting 
     requirements is due to reasonable cause and not willful 
     neglect.
       ``(2) Construction.--Nothing in this subsection shall be 
     construed as limiting any provision of law that provides an 
     opportunity for administrative or judicial review of a 
     determination by the Secretary.
       ``(3) Notice date.--For purposes of this subsection, the 
     notice date is the 30th day after the earlier of--
       ``(A) the date on which the first letter of proposed 
     deficiency that allows the service provider, the service 
     recipient, or the payor an opportunity for administrative 
     review in the Internal Revenue Service Office of Appeals is 
     sent, or
       ``(B) the date on which the deficiency notice 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 service 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 recipient' 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 corporation, 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 operation of the service 
     provider's trade or business.
       ``(6) Principal place of business.--For purposes of 
     subsection (c), a home office shall in any case qualify as 
     the principal place of business if--
       ``(A) the office is the location where the service 
     provider's essential administrative or management activities 
     are conducted on a regular and systematic (and not 
     incidental) basis by the service provider, and
       ``(B) the office is necessary because the service provider 
     has no other location for the performance of the essential 
     administrative or management activities of the business.
       ``(7) Fair market rent.--The term `fair market rent' means 
     a periodic, fixed minimum rental fee which is based on the 
     fair rental value of the facilities and is established 
     pursuant to a written agreement with

[[Page S2432]]

     terms similar to those offered to unrelated persons for 
     facilities of similar type and quality.''
       (b) Clarification of Rules Regarding Evidence of Control.--
     For purposes of determining whether an individual is an 
     employee under the Internal Revenue Code of 1986 (26 U.S.C. 1 
     et seq.), compliance with statutory or regulatory standards 
     shall not be treated as evidence of control.
       (c) 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.
       (d) 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. Safe harbor for determining that certain individuals are 
              not employees.''

       (e) Effective Dates.--
       (1) In general.--The amendments made by, and the provisions 
     of, this section shall apply to services performed after the 
     date of enactment of this Act.
       (2) Determinations by secretary.--Section 3511(g) of the 
     Internal Revenue Code of 1986 (as added by subsection (a)) 
     shall apply to determinations after the date of enactment of 
     this Act.
       (3) Section 530(d).--The amendment made by subsection (c) 
     shall apply to periods ending after the date of enactment of 
     this Act.
                                                                    ____


  Home-Based Business Fairness Act of 1977--Description of Provisions


                              Short Title

       Under Section 1 of the bill, the name of the legislation is 
     ``Home-Based Business Fairness Act of 1997.''


 Increase in the Deduction for Health Insurance Costs of Self-Employed 
                              Individuals

       Section 2 of the bill amends section 162(l)(1) of the 
     Internal Revenue Code of 1986 to increase the deduction for 
     health insurance costs for self-employed individuals to 100 
     percent beginning on January 1, 1997. Currently the limit on 
     deductibility of health insurance costs for these individuals 
     is 40 percent, and it is scheduled to rise to 80 percent by 
     2006, under the provisions in the Health Insurance 
     Portability and Accountability Act of 1996, which was signed 
     into law in August 1996. The bill is designed to place self-
     employed individuals on an equal footing with large 
     businesses which can currently deduct 100% of the health 
     insurance costs of all of their employees.


                Restoration of the Home-Office Deduction

       Section 3 of the bill clarifies the definition of 
     ``principal place of business,'' which relates to the home-
     office deduction under section 280A of the Internal Revenue 
     Code. The bill permits a home office to include an office 
     where a taxpayer performs his or her essential administrative 
     or management activities such as billing and recordkeeping. 
     In order to qualify for the new definition, the taxpayer must 
     perform these activities on a regular, on-going, and non-
     incidental basis in the home office and have no other 
     location at which to perform these business activities. This 
     section of the bill will be effective on January 1, 1997.
       The bill is designed to address the ambiguities resulting 
     from the Supreme Court's 1993 decision, Commissioner v. 
     Soliman. That case has been interpreted to require two new 
     tests for the home-office deduction: (1) the customers of a 
     home business must physically visit the home office, and (2) 
     the taxpayer's business income must be generated within the 
     home office itself--not from transactions that occur outside 
     of the home office. The bill is intended to permit taxpayers 
     who perform their services outside the home but use their 
     home office for essential billing and recordkeeping to 
     qualify for the home-office deduction.


                Safe Harbor for Independent Contractors

       Section 4 of the bill addresses the worker-classification 
     issue (e.g., whether a worker is an employee or an 
     independent contractor) by creating a new section 3511 of the 
     Internal Revenue Code. The new section will provide a general 
     safe harbor and protection against retroactive 
     reclassification of an independent contractor in certain 
     circumstances. The bill is designed to provide certainty for 
     businesses that enter into independent-contractor 
     relationships and minimize the risk of huge tax bills for 
     back taxes, interest, and penalties if a worker is 
     misclassified.

                          General safe harbor

       Under the general safe harbor, if either of two tests is 
     met, an individual will be treated as an independent 
     contractor and the service recipient will not be treated as 
     an employer. The first test requires that the independent 
     contractor demonstrate economic independence and workplace 
     independence and have a written contract with the service 
     recipient.
       Economic independence exists if all of the following apply: 
     the independent contractor has the ability to realize a 
     profit or loss, he or she incurs unreimbursed expenses that 
     are consistent with industry practice and that equal at least 
     2 percent of the independent contractor's adjusted gross 
     income from the performance of services during the taxable 
     year, and the independent contractor agrees to perform 
     services for a particular amount of time or to complete a 
     specific result or task.
       Workplace independence exists if one of the following 
     applies: the independent contractor has a principal place of 
     business (the definition of which includes the provisions of 
     section 3 of the bill, which address the Soliman decision); 
     he or she performs services at more than one service 
     recipient's facilities; he or she pays a fair-market rent for 
     the use of the service recipient's facilities, or the 
     independent contractor uses his or her own equipment.
       The written contract between the independent contractor and 
     the service recipient must provide that the independent 
     contractor will not be treated as an employee.
       Under the second alternative test, an individual will be 
     treated as an independent contractor if he or she conducts 
     business through a corporation or a limited liability company 
     and the independent contractor does not receive benefits from 
     the service recipient--instead the independent contractor 
     would be responsible for his or her own benefits. The 
     independent contractor must also have a written contract with 
     the service provider stating that the independent contractor 
     will not be treated as an employee.
       The general safe-harbor provisions also apply to three-
     party situations in which the independent contractor is paid 
     by a third party, such as a payroll company, rather than 
     directly by the service recipient. The general safe harbor, 
     however, will not apply to a service recipient or a third-
     party payor if they do not comply with the existing reporting 
     requirements and file 1099s for individuals who work as 
     independent contractors. A limited exception is provided for 
     cases in which the failure to file a 1099 is due to 
     reasonable cause and not willful neglect.
       The bill also provides additional relief for cases in which 
     a worker is treated as an independent contractor under the 
     general safe harbor and the IRS later contends that the safe 
     harbor does not apply. In that case, the burden falls on the 
     IRS, rather than the taxpayer, to prove that the safe harbor 
     does not apply. To qualify for this relief the taxpayer must 
     demonstrate a credible argument that it was reasonable to 
     treat the service provider as an independent contractor, and 
     the taxpayer must fully cooperate with reasonable requests 
     from the IRS.
       In the event that the general safe harbor does not apply, 
     the bill makes clear that the independent contractor or 
     service recipient can still rely on the 20-factor common law 
     test or other provisions of the Internal Revenue Code 
     applicable in determining whether an individual is an 
     employee or an independent contractor. In addition, the bill 
     does not limit any relief that a taxpayer may be entitled to 
     under Section 530 of the Revenue Act of 1978. The bill also 
     makes clear that the general safe harbor will not be 
     construed as a prerequisite for these other provisions of the 
     law concerning worker classification.

            Protection against retroactive reclassification

       The bill also provides protection against retroactive 
     reclassification by the IRS of an independent contractor as 
     an employee. For many service recipients who make a good 
     faith effort to classify the worker correctly, this event can 
     result in extensive liability for back employment taxes, 
     interest, and penalties.
       Under the bill, if the IRS notifies a service recipient 
     that an independent contractor should have been classified as 
     an employee, the IRS' determination can become effective only 
     30 days after the date that the IRS sends the notification. 
     To qualify for this provision, the service recipient must 
     show that: There was a written agreement between the parties; 
     the service recipient satisfied the applicable reporting 
     requirements for all taxable years covered by the contract; 
     and there was a reasonable basis for determining that the 
     independent contractor was not an employee and the service 
     provider made the determination in good faith. The bill 
     provides similar protection for independent contractors who 
     are notified by the IRS that they should have been treated as 
     an employee.
       The protection against retroactive reclassification is 
     intended to remove some of the uncertainty for taxpayers who 
     must use the IRS's 20-factor common law test. While the bill 
     would prevent the IRS from forcing a service recipient to 
     treat an independent contractor as an employee for past 
     years, the bill makes clear that a service recipient or an 
     independent contractor can still challenge the IRS's 
     prospective reclassification of an independent contractor 
     through administrative or judicial proceedings.

              Additional independent contractor provisions

       Section 4 of the bill contains two additional provisions 
     designed to assist independent contractors. The first 
     clarifies that an individual's compliance with a statutory or 
     regulatory requirement will not be treated as evidence of 
     control. The 20-factor common law test focuses in part on the 
     business' control over a worker. When the business can direct 
     how, when and where a worker performs a task; such control 
     usually indicates that the worker is an employee rather than 
     an independent contractor. Certain statutory and regulatory 
     requirements, which a business and/or a worker must follow, 
     have been interpreted by the IRS as demonstrating evidence of 
     this type of control when the majority of other factors would 
     lead to the conclusion that a worker is an independent 
     contractor. The bill clarifies that compliance with statutory 
     or regulatory requirements should not be a factor in 
     determining whether an individual is an independent 
     contractor.
       Second, the bill would repeal section 530(d) of the Revenue 
     Act of 1978, which was added

[[Page S2433]]

     by section 1706 of the Tax Reform Act of 1986. This provision 
     precludes technical service providers (e.g., engineers, 
     designers, drafters, computer programmers, systems analysts, 
     and other similarly qualified individuals) who work through a 
     third party, such as a placement broker, from applying the 
     safe harbor under section 530. The bill is designed to level 
     the playing field for individuals in these professions.

                            Effective dates

       In general, the independent-contractor provisions of the 
     bill, including the general safe harbor, will be effective 
     for service performed after the date of enactment of the 
     bill. The protection against retroactive reclassification 
     will be effective for IRS determinations after the date of 
     enactment, and the repeal of section 530(d) will be effective 
     for periods ending after the date of enactment of the bill.

  Mr. NICKLES. Mr. President, I am pleased to join my friend and 
colleague from Missouri, Senator Bond, in the introduction of the Home-
Based Business Fairness Act. I compliment Senator Bond for his 
leadership on these issues and all matters affecting small business as 
chairman of the Senate Committee on Small Business.
  The small, independent business is the engine which drives 
innovation, job creation, and increased economic activity in this 
country. I am proud to live in a country where any person can use 
talent, intelligence, and hard work to start a business. I believe 
these businesses are the foundation of our free enterprise economy, and 
the very essence of capitalism.
  There are 5 million independent contractors in America according to 
the Small Business Administration, and almost one-third of all 
companies use independent contractors to some degree. Further, the SBA 
estimates that more than 14 million individuals earn some income from 
home-based businesses, and some 300,000 women start home-based 
businesses every year.
  Unfortunately, Mr. President, the Internal Revenue Code does not 
always treat small businesses fairly, and it often acts to limit and 
repress the entrepreneurial spirit. The legislation we are introducing 
today is intended to address some of the Tax Code's inequities and 
remove the roadblocks to the creation of new small businesses.
  A perfect example of the Tax Code's bias against small business is 
the treatment of health insurance expenses. Corporations can currently 
deduct 100 percent of the health insurance costs of their employees. As 
recently as 2 years ago, self-employed individuals were only allowed to 
deduct 25 percent of their health insurance costs. Fortunately, the 
Health Insurance Portability and Accountability Act of 1996 increased 
this limit to 40 percent this year, with a scheduled increase to 80 
percent by 2006. However, the bias against small business continues. 
Our legislation increases the deduction for health insurance cost for 
self-employed individuals to 100 percent beginning on January 1, 1997.
  For some small business taxpayers, the enemy has not been the IRS or 
the Congress, but the judiciary. A 1993 Supreme Court decision, 
Commissioner versus Soliman has been interpreted to require two new 
tests for the home-office deduction: First, the customers of a home 
business must physically visit the home office, and second, the 
taxpayer's business income must be generated within the home office 
itself--not from transactions that occur outside of the home office. 
This interpretation has effectively prevented millions of taxpayers 
from deducting valid, reasonable, and necessary business expenses. The 
Home-Based Business Fairness Act will permit taxpayers who perform 
their services outside the home but use their home office for essential 
billing and recordkeeping to qualify for the home-office deduction, 
provided they perform these activities on a regular, ongoing, and 
nonincidental basis in the home office and have no other location at 
which to perform these business activities. This section of the bill 
will be effective on January 1, 1997.
  Finally, Mr. President, our legislation addresses a major, continuing 
problem for the small business community. The problem is worker 
classification--independent contractor or employee. In a perfect world, 
this issue should be irrelevant. The relationship between a worker and 
a business would be strictly based on their individual needs, and the 
Government's only interest would be to collect the same amount of taxes 
regardless of the relationship.
  Unfortunately, however, this is not a perfect world. The complexity 
of the Tax Code and Congress' failure to provide adequate guidance to 
small businesses and their workers has resulted in a confusing mess. 
Left to their own devices, the Internal Revenue Service has adopted an 
aggressive, proemployee agenda.
  For the last 20 years, the classification of workers as contractors 
or employees has been controlled by a 20-factor common law test which 
attempts to define a business' control over a worker. This common law 
test is the bane of employers and workers across the country. The 
General Accounting Office has called the common law test unclear 
and subject to conflicting interpretations. Even the Treasury 
Department has testified that:

       Applying the common law test in employment tax issues does 
     not yield clear, consistent, or even satisfactory answers, 
     and reasonable persons may differ as to the correct 
     classification.

  Beyond the 20-factor test, some businesses may avail themselves of a 
safe harbor enacted in 1978. The section 530 safe harbor prohibits the 
IRS from reclassifying workers as employees if the business had a 
reasonable basis for treatment of the workers as independent 
contractors, or if a past IRS audit did not dispute the workers' 
classification.
  Our bill creates a new worker classification safe harbor and provides 
limited relief from retroactive worker reclassification, two changes 
which will resolve many of the problems small businesses face with the 
IRS. Our bill does not repeal the 20-factor common law test, it does 
not repeal the section 530 safe harbor, and it does not affect other 
special worker classification situations such as statutory employees or 
direct sellers. Put simply, our bill will benefit those businesses and 
contractors who have not resolved their status with the IRS, while 
preserving current law for those who are satisfied with it.
  To summarize briefly, our legislation protects businesses and 
contractors who meet one of two tests. The first test measures a 
worker's economic risk and workplace independence, and requires the two 
parties to have a written contract and comply with all tax reporting 
requirements. Under the second test, a worker who conducts business 
through a corporation or a limited liability company, does not receive 
benefits from the service recipient, and has a written contract will be 
treated as an independent contractor.
  Our bill also protects businesses from retroactive reclassification 
of workers and the associated liability for back taxes, interest, and 
penalties, provided the business had a written contract with the 
workers, complied with all tax reporting requirements, and had a 
reasonable basis to treat the workers as contractors. Finally, our 
legislation repeals section 1706 of the Tax Reform Act of 1986 which 
precludes third-party technical service workers from the section 530 
safe harbor, and it clarifies that compliance with a statutory or 
regulatory requirements will not be treated as evidence of control for 
the purpose of worker classification.
  Mr. President, the Tax Code reforms included in the Home-Based 
Business Fairness Act are commonsense solutions to the real problems 
faced by small businesses. With this bill, Senator Bond and I have 
tried to address those problems which we believe are most critical to 
the creation of new small businesses, new jobs, and new economic 
growth. I encourage my colleagues to give this legislation their 
thoughtful consideration and join us in this initiative.
  Mr. ENZI. Mr. President, I rise in strong support of The Home-Based 
Business Fairness Act of 1997, introduced today by the chairman of the 
Small Business Committee, Senator Bond. I know that Senator Bond, 
Senator Nickles and Senator Snowe have worked hard to draft this bill 
and I am proud to be an original cosponsor. It addresses three concerns 
that have weighed heavily on the small business community for years: 
First health insurance fairness; second the home-office deduction; and 
third the status of independent contractors. I hope the Senate and the 
House will move quickly to pass this legislation.
  It is a good bill because it responds directly to what small 
businesses have been asking us to do. It will help create

[[Page S2434]]

jobs that will put people on welfare back to work. This is an issue 
that policymakers have been concentrating on since last year's welfare 
debate--the President has proposed a Welfare to Work Program while 
Congress is looking at the best ways to stimulate the economy and 
create jobs. Toward that effort, it is impossible to overlook the 
importance of small business. Small businesses create nearly 100 
percent of this country's new jobs and employ over 65 percent of 
Americans working in the private sector. And I guarantee it would be 
small businesses that hire the majority of today's welfare recipients 
if Government would make it affordable to do so.
  Small business is more than the backbone of this country. Small 
business is the engine of the American Dream. But it needs a system 
that empowers people, not government. This bill would help people by 
removing just a couple of the obstacles in the way of that Dream.
  When I was elected to the Senate last November, my first choice of 
committee assignments was the Small Business Committee. My wife, Diana, 
and I were small businessowners and we have experienced--at one time or 
another--nearly all of the obstacles that can stand in the way of a 
successful small business. At this time last year, in fact, my wife and 
I were balancing our books and paying our taxes--hoping to find that 
the books still balanced after paying the taxes! So I know what small 
businessowners are going through. Very recently, I have been there.
  There is a lot of talk in this legislative body about improving the 
environment for small business. In fact, I doubt that any Member would 
stand up and say he or she does not support small business. We hold 
hearings and listen to testimony, we provide for White House 
conferences on small business, we receive stacks of polling data and we 
create commission after commission to tell us what needs to be done. In 
the end, we find out what I think we already know--the problem is 
taxes. Too many and too much.
  This bill is a small step in the Tax Code, but a giant step for 
sensibility. It recognizes some of the revolutionary changes in 
American business. The advent of personal computers, high speed modems, 
cell phones, pagers, and fax machines that have enabled Americans to 
work via audio and video conferencing, from satellite offices, and by 
telecommuting. Our tax laws have not kept up with the sea of change in 
American business.

  One example of this change is the increasing number of women in our 
Nation's work force. According to the Bureau of Labor Statistics, 76 
percent of mothers with school-age children now work. Among two-parent 
households, 63 percent report that both parents must work outside the 
home--in many cases, one works to pay the bills, while the other works 
to pay the taxes. And of these women entering the work force, 1 in 20 
are starting their own businesses and many are home based and that 
number is rising rapidly. In fact, women start new businesses at twice 
the rate of men--and with a very good success rate. But the Tax Code 
needs improvement. It discourages self-employment and home-based 
business through discrimination and complexity. This bill would change 
that.
  The Home-Based Business Fairness Act would finally put an end to our 
regressive, two-tiered system that makes self-employed people pay more 
for their health insurance. It is time to give small business 
competitive parity with big business. All the technical assistance and 
loan guarantees in the world cannot overcome unfair tax treatment and 
disproportionately burdensome regulations. Last year, Congress 
recognized the inequality by voting to phase in an 80-percent 
deductibility for health insurance costs. That's a good start. But if 
we know the tax treatment is not fair, then shouldn't we make it right? 
America's small businesses need fair and equal treatment.
  This legislation would also add fairness for people who work in their 
homes. Our current outdated Tax Code discriminates against home-based 
people by restricting their ability to deduct office expenses. The 
message is, if you can't afford a real office, then you can't deduct 
your expenses. In this way, we increase the hurdles for entrepreneurs 
who want to earn a living, but can't afford to rent separate office 
space. This part of the legislation will benefit thousands of home-
based women and men. It is very important and deserves a thoughtful 
consideration by the Senate.
  Another puzzling antibusiness setup that this bill would simplify is 
the definition of independent contractor. American entrepreneurs--and 
especially home-based business owners--need a simpler test. I have 
always believed we could make things a lot easier if we just followed 
the payroll taxes. Who pays them? Is there a written contract? It does 
not have to be ``rocket science.'' This legislation would simplify the 
test so that everyone can understand it--not just the tax attorneys at 
the Internal Revenue Service.
  On that subject, in Wyoming recently, the IRS has taken after the 
last bastion of budding entrepreneurs, our paper boys. Once again, the 
thirsty IRS auditors are devising ways to haunt working people--
presumed guilty until proven innocent. When did the IRS decide to pick 
on the hard-earned wages of independent paperboys and girls? They are 
not now, and never have been, salaried newspaper employees. They are 
just kids who want to earn some money by working before or after 
school.
  I think we should call this part of the bill, The Paperboy Protection 
Act. The last bastion for new entrepreneurs needs our help. The small 
business owners of tomorrow are counting on us to pass this 
legislation. I thank my colleagues on the Small Business Committee, and 
the assistant majority leader, for their hard work on the bill. I urge 
other Senators to support it.
                                 ______