A recently introduced bill, the Independent Contractor Tax Fairness and Simplification Act of 2015, H.R. 2483, would incorporate a slightly modified version of section 530 of the Revenue Act of 1978 (“Section 530”) into the Internal Revenue Code (the “Code”), and create a new independent-contractor safe-harbor provision. The bill was introduced on May 20, 2015, by House Ways and Means Committee Member Erik Paulsen, (R-Minn.). The bill is generally supportive of independent-contractor status, but the new safe harbor it proposes would not likely be of value to service-based businesses.
The bill is virtually identical to a bill that Rep. Paulsen introduced, as H.R. 6653, in the 112th Congress on December 12, 2012.
As noted, the bill has two component parts, namely, (i) the codification of Section 530, and (ii) the creation of a new safe harbor. Section 530 would be codified as new Code section 3512. The new safe harbor would be enacted as new Code section 3513.
Codified Section 530
By way of background, Section 530 protects a business against federal employment-tax liabilities with respect to a worker, provided that the business:
- Since 1978, has consistently treated the covered worker (and all other workers holding “substantially similar” positions) as nonemployees for federal employment-tax purposes (the “substantive consistency requirement”),
- For the tax year at issue, reported on a Form 1099 the amount of compensation the business paid to the covered worker during the year (of at least $600), and
- Treated the covered worker as a nonemployee in reliance on a “reasonable basis.”
The proposed codified version of Section 530, which is similar to what was proposed in H.R. 6653, would differ from Section 530 in the following four respects.
- The Form 1099 requirement of Section 530 currently requires that in the case of periods after December 31, 1978, the taxpayer files “all federal tax returns (including information returns) with respect to covered workers on a basis consistent with such workers not being employees.” The bill would modify this requirement by deleting the word “federal” immediately before the words “tax returns.”
Commentary: It is not clear why the bill would delete the term federal. The deletion arguably could create uncertainty as to whether the provision would be satisfied only by a taxpayer filing both federal and state tax returns (instead of only federal) on a basis consistent with the taxpayer’s treatment of covered workers as not being employees.
- The substantive consistency requirement of Section 530 currently requires that for any period ending after December 31, 1978, the taxpayer (or a predecessor) cannot have treated any individual holding a position that is substantially similar to the position held by a covered worker as an employee for purposes of the employment taxes for any period beginning after December 31, 1977. The bill would modify this requirement by changing 1978 to 2015, and 1977 to 2014.
Commentary: A principal effect of this proposed change would be to create a type of fresh start relief for taxpayers, under which any violation of Section 530’s substantive consistency requirement that occurred during a period beginning on or before December 31, 2014, would not disqualify a taxpayer from Section 530 protection with respect to periods ending after December 31, 2015.
- The bill retains Section 530’s prohibition against the Treasury Department, including the Internal Revenue Service, issuing precedential guidance clarifying the status of individuals for federal employment-tax purposes, but would permit the issuance of guidance interpreting the proposed new safe harbor. The bill also would delete language contained in Section 530 that provides that the prohibition against the issuance of guidance remains in effect only until such time that a law is enacted clarifying the employment status of individuals.
Commentary: The deleted language appears intended to clarify that new Code section 3512 is not a temporary provision.
- The final proposed modification to Section 530, as codified, is a deletion of certain provisions, enacted as part of the Pension Protection Act of 2006, that offer special treatment for purposes of Section 530 of test room supervisors and proctors for college entrance and placement exams.
Commentary: For tax periods beginning after the date of enactment of the bill, the special rules for test room supervisors and proctors for college entrance and placement exams would no longer apply.
New Safe Harbor
The proposed new independent-contractor safe harbor, which would be enacted as new Code section 3513, would have a broader effect than Section 530. While Section 530 applies only for purposes of federal employment taxes, the new safe harbor would apply for purposes of federal employment and income taxes. While Section 530 applies only with respect to a taxpayer that contracts with an individual (but not the individual), the new safe harbor would apply with respect to the individual, the service recipient, and the payor of compensation to the individual, if different from the service recipient.
The proposed independent-contractor safe harbor, under which covered relationships would be treated as independent-contractor relationships, would be satisfied only if both of the following two requirements are met.
Requirement #1:
The service provider–
(A) incurs significant financial responsibility for providing and maintaining the necessary equipment and facilities to perform the work outlined in their qualified agreement,
And
(B) either–
(i) incurs unreimbursed expenses,
or
(ii) risks income fluctuations because the remuneration with respect to such service is directly related to sales or other output rather than solely to the number of hours actually worked or expenses incurred.
AND
Requirement #2:
The service provider–
(A) is compensated upon factors related to the work performed, such as a percentage of revenue or scheduled rates, and not solely on the basis of hours or time expended,
And
(B) substantially controls the means and manner of performing the services, in conformance with regulatory requirements, the specifications of the service recipient or payor and any additional requirements specified in the qualified agreement.
For these purposes, the bill defines a “qualified agreement” to mean a written contract between a service provider and the service recipient (or the payor) that provides that the service provider—
(1) will not be treated as an employee with respect to such services for the purpose of the Internal Revenue Code, and
(2) has been informed of the Federal tax obligations resulting from such treatment.
The bill defines the term “service provider” to mean any individual or entity that performs service for another company under a qualified agreement, and clarifies that the terms service recipient and payor do not include any entity which is owned in whole or in part by the service provider.
Commentary: The proposed safe harbor would not be especially helpful to service-based firms, because service providers generally do not have significant financial responsibility for providing and maintaining the necessary equipment and facilities to perform the work, which means that they likely could not satisfy Requirement #1.
* * *
Overall, H.R. 2483 is intended to help preserve the right of independent contractors and their clients to do business with each other. The codification of Section 530 could be a significant accomplishment, to refute criticisms that it is only intended to be a temporary measure. The proposed safe harbor illustrates the difficulty of devising a new safe-harbor provision.
Click here to view the full text of H.R. 2483.
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