[Congressional Record Volume 145, Number 19 (Wednesday, February 3, 1999)]
[Senate]
[Pages S1153-S1157]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BOND (for himself, Mr. Nickles, Ms. Snowe, Mr. Coverdell, 
        Mr. Bennett, and Mr. Cochran):
  S. 344. A bill to amend the Internal Revenue Code of 1986 to provide 
a safe harbor for determining that certain individuals are not 
employees; to the Committee on Finance.


      independent contractor simplification and relief act of 1999

  Mr. BOND. Mr. President, small businesses today face enormous burdens 
when it comes to taxes. Each year they pay a growing portion of their 
revenues on income, employment, and excise taxes. Yet even before they 
write the tax check, they spend more than 5% of their revenues just to 
comply with the tax laws. These revenues are spent on accountants, 
bookkeepers, and lawyers to sort out the countless pages of tax laws, 
regulations, forms, instructions, rulings, and other guidance published 
by the IRS. In addition, small business owners must dedicate valuable 
time and energy on day-to-day recordkeeping and other compliance 
requirements, all of which keep them from doing what they do best--
running their business.

  As the Chairman of the Committee on Small Business, I have heard from 
small business owners in Missouri and across this country that they are 
more than willing to pay their fair share of taxes. But what they 
object to is paying high tax bills and vast amounts for professional 
tax assistance only to end up the victim of an unfair tax code.
  Mr. President, I rise today to introduce legislation that will 
eliminate two major sources of that unfairness and provide a level 
playing field for the millions of men and women who work exceedingly 
hard to make their small enterprises a success. These bills are common-
sense measures that respond to the calls from small businesses for tax 
fairness and simplicity.
  My first bill, the ``Self-Employed Health Insurance Fairness Act of 
1999,'' will end one of the most glaring inequities that has existed in 
our tax law--the deductibility of health-insurance costs for the self-
employed. For nearly five years, I have been working to see that the 
self-employed receive equal treatment when it comes to the 
deductibility of health insurance.
  During the 105th Congress, we made substantial progress. First, in 
the Taxpayer Relief Act of 1997, we broke through the long-standing cap 
on the deduction to provide 100% deductibility. Then, last Fall, we 
passed legislation that will speed up the date that self-employed 
persons can fully deduct their health-insurance costs to 2003. We also 
significantly increased the deductible amounts in the intervening years 
over the prior law. While I strongly supported these improvements, the 
self-employed still cannot wait four more years for 100% deductibility 
when their large corporate competitors have long been able to deduct 
such costs in full.
  With the self-employed able to deduct only 60% of their health-
insurance costs today, it comes as no surprise that nearly a quarter of 
the self-employed still do not have health insurance. In fact, five 
million Americans live in families headed by a self-employed individual 
and have no health insurance. And those families include 1.3 million 
children who lack adequate health-insurance coverage.
  Mr. President, it is time to finish the job once and for all in this 
Congress. My bill will increase the deductibility of health insurance 
for the self-employed to 100% beginning this year. A full deduction 
will make health insurance more affordable to the self-employed and 
help them and their families get the health insurance coverage that 
they need and deserve.
  The ``Self-Employed Health Insurance Fairness Act'' also corrects 
another inequity in the tax law affecting the self-employed who try to 
provide health insurance for themselves, their families, and their 
employees. Under current law, the self-employed lose all of the health-
insurance deduction if they are eligible to participate in another 
health-insurance plan--whether or not they actually participate.
  This provision affects self-employed individuals like Steve Hagan in 
my hometown of Mexico, Missouri. Mr. Hagan is a financial planner who 
runs his own small business. Although he has a group medical plan for 
his employees, Mr. Hagan cannot deduct the cost of covering himself or 
his family simply because his wife is eligible for health insurance 
through her employer. The inequity is clear. Why should he be able to 
deduct the insurance costs for his employees but not for himself and 
his family? What if the insurance available through his wife's employer 
does not meet the needs of their family?
  Besides being patently unfair, this is also an enormous trap for the 
unwary. Imagine the small business owner who learns that she can now 
deduct 60% of her health-insurance costs this year, and with the extra 
deduction, she can finally afford a group medical plan for herself and 
her employees. Then later in the year, her husband gets a new job that 
offers health insurance. Suddenly, her self-employed health-insurance 
deduction is gone, and she is left with two choices. She can bear the 
entire cost of her family's coverage, or terminate the insurance 
coverage for all her employees. The tax code should not force small 
business owners into this kind of ``no win'' situation when they try to 
provide insurance coverage for their employees and themselves.
  My bill eliminates this problem by clarifying that the self-employed 
health-insurance deduction is limited only if the self-employed person 
actually participates in a subsidized health insurance plan offered by 
a spouse's employer or through a second job. It's simply a matter of 
fairness, and a step we need to take now.
  The second bill that I introduce today is the ``Independent 
Contractor Simplification and Relief Act of 1999.'' This bill will 
provide clear rules and relief for entrepreneurs seeking to be treated 
as independent contractors and for businesses needing to use 
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 sense and that serves their personal and 
family goals.
  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 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, small business taxpayers are 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 two 
or three 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 piled on. The result for many 
small businesses is a tax bill that bankrupts the company. But 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 her 
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

[[Page S1154]]

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 subjective. And the result is that businesses must 
spend thousands of dollars on lawyers and accountants to try to satisfy 
the IRS' procedures, but with no certainty that the conclusions will be 
respected. That's no way for businesses to operate in today's rapidly 
changing economy.
  For its part, the IRS has adopted a worker classification training 
manual, which according to the agency is 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 
IRS' training manual is more than 150 pages. If it takes that many 
pages to teach revenue agents how to ``simplify and clarify'' this 
small business tax issue, I think we can be sure how simple and clear 
it is going to seem to taxpayers who try to figure it out on their own.
  The ``Independent Contractor Simplification and Relief Act'' is based 
on the provisions of my Home-Based Business Fairness Act, which I 
introduced at the start of the 105th Congress. My bill removes the need 
for so many pages of instruction on the 20-factor test by establishing 
clear rules for classifying workers 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 corporation or limited 
liability company will also qualify as independent contractors 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 three requirements that I believe will improve 
compliance among independent contractors using the new rules I propose. 
First, there must be a written agreement between the parties--this will 
put the independent contractor on notice at the beginning that he is 
responsible for his own tax payments. Second, the new rules will not 
apply if the service recipient does not comply with the reporting 
requirements and issue 1099s to individuals who perform services. 
Third, an independent contractor operating through his own corporation 
or limited liability company must file all required income and 
employment tax returns in order to be protected under the bill.
  In the last Congress, concerns were raised that permitting 
individuals who provide their services through their own corporation or 
limited liability company to qualify as independent contractors would 
lead to abusive situations at the expense of workers who should be 
treated as employees. To prevent this option from being abused, I have 
added language that limits the number of former employees that a 
service recipient may engage as independent contractors under the 
incorporation option. This limit will protect against misuse of the 
incorporation option while still allowing individuals to start their 
own businesses and have a former employer as one of their initial 
clients.
  Another major concern of many businesses and independent contractors 
is the issue of reclassification. My bill provides relief to these 
taxpayers when the IRS determines that a worker was misclassified. 
Under my 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 an IRS reclassification 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 section affects 
businesses that engage technical service providers, such as engineers, 
designers, drafters, computer programmers, and systems analysts. In 
certain cases, Section 1706 precludes these businesses from applying 
the reclassification protections under section 530 of the Revenue Act 
of 1978. When section 1706 was enacted, its proponents argued that 
technical service workers 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 last two Congresses, proposals to repeal section 1706 enjoyed 
wide bipartisan support. The bill I introduce today is designed to 
level the playing field for individuals in these professions by 
providing the businesses that engage them with the same protections 
that businesses using other types of independent contractors have 
enjoyed for more than 20 years.
  Mr. President, the bills I introduce today are common-sense measures 
that answer small business' urgent plea for fairness and simplicity in 
the tax law. As we work toward the day when the entire tax law is based 
on these principles, we can make a difference today by enacting these 
two bills. Entrepreneurs have waited too long--let's get the job done!
  Mr. President, I ask unanimous consent to include in the Record a 
copy of each bill and a description of its provisions.
  There being no objection, the items were ordered to be printed in the 
Record, as follows:

                                 S. 343

       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 ``Self-Employed Health 
     Insurance Fairness Act of 1999''.

     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 the taxable year for 
     insurance which constitutes medical care for the taxpayer, 
     the taxpayer's spouse, and dependents.''
       (b) Clarification of Limitations on Other Coverage.--The 
     first sentence of section 162(l)(2)(B) of the Internal 
     Revenue Code of 1986 is amended to read as follows: 
     ``Paragraph (1) shall not apply to any taxpayer for any 
     calendar month for which the taxpayer participates in any 
     subsidized health plan maintained by any employer (other than 
     an employer described in section 401(c)(4)) of the taxpayer 
     or the spouse of the taxpayer.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.
                                  ____


  Self-Employed Health Insurance Fairness Act of 1999--Description of 
                               Provisions

       The bill amends section 162(l)(1) of the Internal Revenue 
     Code to increase the deduction for health-insurance costs for 
     self-employed individuals to 100% beginning on January 1, 
     1999. Currently the self-employed can only deduct 60% percent 
     of these costs. The deduction is not scheduled to reach 100% 
     until 2003, under the provisions of the Omnibus Consolidated 
     and Emergency Supplemental Appropriations Act of 1998, which 
     was signed into law in October 1998. 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 for all of their employees.
       The bill also corrects a disparity under current law that 
     bars a self-employed individual from deducting any of his or 
     her health-insurance costs if the individual is eligible to 
     participate in another health-insurance plan. This provision 
     affects self-employed individuals who are eligible for, but

[[Page S1155]]

     do not participate in, a health-insurance plan offered 
     through a second job or through a spouse's employer. That 
     insurance plan may not be adequate for the self-employed 
     business owner, and this provision prevents the self-employed 
     from deducting the costs of insurance policies that do meet 
     the specific needs of their families. In addition, this 
     provision provides a significant disincentive for self-
     employed business owners to provide group health insurance 
     for their employees. The bill ends this disparity by 
     clarifying that a self-employed person loses the deduction 
     only if he or she actually participates in another health-
     insurance plan.
                                  ____


                                 S. 344

       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 ``Independent Contractor 
     Simplification and Relief Act of 1999''.

     SEC. 2. SAFE HARBOR FOR DETERMINING THAT CERTAIN INDIVIDUALS 
                   ARE NOT EMPLOYEES.

       (a) In General.--Chapter 25 (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 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) agrees to perform services for a particular amount of 
     time or to complete a specific result or task, and
       ``(3) either--
       ``(A) incurs unreimbursed expenses which are ordinary and 
     necessary to the service provider's industry and which 
     represent an amount equal to at least 2 percent of the 
     service provider's adjusted gross income attributable to 
     services performed pursuant to 1 or more contracts described 
     in subsection (d), or
       ``(B) has a significant investment in assets.
       ``(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 from 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 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 Requirements.--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 
     any 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) 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 liability 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 foreign entity, the 
     country), and year of, incorporation or formation, provides a 
     mailing address, and includes the service provider'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 
     company,
     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 number of covered workers which are not treated 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 purposes of this paragraph, 
     the term `threshold number' means, for any calendar year, the 
     greater of (I) 10 covered workers, or (II) a number equal to 
     3 percent of covered workers.
       ``(iii) Covered worker.--For purposes 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 treatment shall 
     be on the Secretary.
       ``(4) 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) 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 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 contract 
     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 contract 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--

[[Page S1156]]

       ``(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), the term `principal place of business' has 
     the same meaning as under section 280A(c)(1) (as in effect 
     for taxable years beginning after December 31, 1998).
       ``(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 contract with terms similar to those 
     offered to unrelated persons 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 determinations 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.
                                  ____


     Independent Contractor Simplification and Relief Act of 1999--
                       Description of Provisions

       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 straightforward rules for 
     classifying workers and provide relief from the IRS' 
     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 after the parties have entered into an 
     independent-contractor relationship in good faith.


                 Clear Rules for Worker Classification

       Under the bill's new worker-classification rules, an 
     individual will be treated as an independent contractor and 
     the service recipient will not be treated as an employer if 
     either of two tests is met--the ``general test'' or the 
     ``incorporation test.''
       General Test: The general 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 the independent contractor 
     has the ability to realize a profit or loss and agrees to 
     perform services for a particular amount of time or to 
     complete a specific result or task. In addition, the 
     independent contractor must either incur unreimbursed 
     expenses that are consistent with industry practice and that 
     equal at least 2% of the independent contractor's adjusted 
     gross income from the performance of services during the 
     taxable year, or have a significant investment in the assets 
     of his or her business.
       Workplace independence exists if one of the following 
     applies: the independent contractor has a principal place of 
     business (including a ``home office'' as expanded by the 
     Taxpayer Relief Act of 1997); 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 and is 
     responsible for his or her own taxes.
       Incorporation Test: Under this test, an individual will be 
     treated as an independent contractor if he or she conducts 
     business through a corporation or a limited liability 
     company. In addition, the independent contractor must be 
     responsible for his or her own benefits, instead of receiving 
     benefits from the service recipient. 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 and is responsible for his or her own 
     taxes.
       To prevent the incorporation test from being abused, the 
     bill limits the number of former employees that a service 
     recipient may engage as independent contractors under this 
     test. The limitation is based on the number of people 
     employed by the service recipient in the preceding year and 
     is equal to the greater of 10 persons or 3% of the service 
     recipient's employees in the preceding year. For example, 
     Business X has 500 employees in 1998. In 1999 up to 15 
     employees (the greater of 3% of Business X's 1998 employees 
     or 10 individuals) could incorporate their own businesses and 
     still have Business X as one of their initial clients. This 
     limitation would not affect the number of incorporated 
     independent contractors who were not former employees of the 
     service recipient or independent contractors meeting the 
     general test.
       Additional Provisions: The new worker-classification rules 
     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 
     new worker-classification rules, 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.
       New Worker-Classification Rules Do Not Replace Other 
     Options: In the event that the new worker-classification 
     rules do 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 independent contractor or employee. In addition, the 
     bill does not limit any relief to which a taxpayer may be 
     entitled under Section 530 of the Revenue Act of 1978. The 
     bill also makes clear that the new rules will not be 
     construed as a prerequisite for these other provisions of the 
     law.


                      Relief From Reclassification

       The bill provides relief from 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.
       Relief Under the New Worker-Classification Rules: The bill 
     provides relief for cases in which a worker is treated as an 
     independent contractor under the new worker-classification 
     rules and the IRS later contends that the new rules do not 
     apply. In that case, the burden of proof will fall on the 
     IRS, rather than the taxpayer, to prove that the new worker-
     classification rules do 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 under the new rules, and the taxpayer must fully 
     cooperate with reasonable requests from the IRS.
       Protection Against Retroactive Reclassification: If the IRS 
     notifies a service recipient that an independent contractor 
     should have been classified as an employee (under the new or 
     old rules), the bill provides that 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 businesses 
     contracting with independent contractors, especially those 
     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.


           Repeal of Section 1706 of the Revenue Act of 1978

       The bill repeals section 530(d) of the Revenue Act of 1978, 
     which was added by section 1706 of the Tax Reform Act of 
     1986. This provision precludes businesses that engage 
     technical service providers (e.g., engineers, designers, 
     drafters, computer programmers, systems analysts, and other 
     similarly qualified individuals) in certain cases from 
     applying the reclassification protections under section 530. 
     The bill is designed to level the

[[Page S1157]]

     playing field for individuals in these professions by 
     providing the businesses that engage them with the same 
     protections that businesses using other types of independent 
     contractors have enjoyed for more than 20 years.


                            Effective Dates

       In general, the independent-contractor provisions of the 
     bill, including the new worker- classification rules, will be 
     effective for services 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.
                                 ______