New independent contractor bill.

New legislation was introduced in the House on April 23 that would clarify the difference between independent contractors and employees for federal tax purposes. The Independent Contractor Tax Simplification Act of 1998 (HR 3722), sponsored by Congressman Jon Christensen (R-Neb.), provides a simple set of criteria for determining who is not an employee.

Currently, worker classification is determined by applying common-law standards which have not changed in decades. Based on these standards, the IRS created a 20-factor common-law test that focuses on the employer's control over when, where and how the work gets done. It has been argued that this test not only is ambiguous and difficult to apply but also has been rendered obsolete by modern telecommuting techniques.

HR 3722 substitutes for the 20-factors a simple three-part test that examines the service provider's investment, workplace and written documentation. The service provider is not considered to be an employee and the service recipient is not considered to be an employer if the criteria are met in all three parts.

For example, the three-part test would determine whether the individual

1. Has a significant investment in assets and/or training and incurs significant unreimbursed expenses.

2. Has a principal place of business and does not primarily provide the service in the service recipient's place of business.

3. Is performing services pursuant to a written contract.

Christensen commented that the three-part test is a common-sense approach to an old problem. "Clarifying the tangled federal tax provisions with respect to the distinction between fulltime employee and independent contractor status has emerged as the top priority of the nation's small business community" he said.

HR 3722 is very similar to an independent contractor bill that was introduced in the House in 1995. That bill became part of the House version of the Taxpayer Relief Act of 1997 but was not included in the final bill.