article: SECTION 1. SHORT TITLE. This Act may be cited as the ``Misclassification of Employees Act''. SEC. 2. PROCEDURES APPLICABLE TO DETERMINATIONS OF EMPLOYMENT STATUS. (a) Waiver of Employment Tax Liability for Reasonable Good Faith Misclassification Based on Common Law Rules.-- (1) In general.--Section 3509 of the Internal Revenue Code of 1986 (relating to determination of employer's liability for certain employment taxes) is amended by adding at the end the following new subsection: ``(e) Waiver of Employment Tax Liability for Reasonable Good Faith Misclassification Based on Common Law Rules.-- ``(1) In general.--For purposes of determining the liability of any taxpayer for employment taxes with respect to any individual for any period, such individual shall be deemed not to have been an employee of the taxpayer for such period if-- ``(A) the taxpayer did not treat such individual as an employee for purposes of the employment taxes for such period, ``(B) the taxpayer's treatment of such individual as not being an employee was based on a reasonable good faith misapplication of the common law rules used for determining the employer-employee relationship, ``(C) all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period were filed on a basis consistent with the taxpayer's treatment of such individual as not being an employee, ``(D) the taxpayer (and any predecessor) did not treat any other individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 1977, and ``(E) the taxpayer enters into a closing agreement under section 7121 with the Secretary (in the time and manner determined by the Secretary) agreeing to treat such individual, and any other individual holding a substantially similar position, as employees and to file all Federal employment tax returns with respect to such individuals on a basis consistent with the taxpayer's treatment of such individuals as employees. ``(2) Definition and special rules.-- ``(A) Employment tax.--For purposes of this subsection, the term `employment tax' means any tax imposed by this subtitle, including any interest, penalty, or additional amount with respect to such tax. ``(B) No refund or credit of overpayment.--No refund or credit of any overpayment of an employment tax resulting from the application of paragraph (1) shall be allowed, notwithstanding that the period for filing a claim for refund or credit of such overpayment is not barred on the effective date of this subsection. ``(3) Termination.--This subsection shall not apply if the closing agreement referred to in paragraph (1)(E) is entered into more than 1 year after the date of the enactment of this subsection.'' (2) Monitoring of closing agreement required.--The Secretary of the Treasury or his delegate shall monitor compliance with each closing agreement referred to in section 3509(e)(1)(E) of the Internal Revenue Code of 1986 (as added by this section) for not less than 5 years after the date such agreement is entered into. Such monitoring shall include not only monitoring the payments made to the individuals specified in the agreement but also the aggregate wages paid to employees and the aggregate payments to independent contractors for services. (b) Modifications to Safe Harbor for Classifications of Individuals as Nonemployees.-- (1) Requirement of reasonable basis.--Paragraph (1) of section 530(a) of the Revenue Act of 1978 (relating to controversies involving whether individuals are employees for purposes of the employment taxes) is amended by striking ``unless the taxpayer had no reasonable basis'' and inserting the following: ``if the taxpayer had a reasonable basis''. (2) Only recent employment tax audit is reasonable basis.-- (A) In general.--Paragraph (2) of section 530(a) of the Revenue Act of 1978 is amended-- (i) by striking the paragraph caption and inserting the following: ``Reasonable basis for not treating individual as employee.--'', (ii) in the matter preceding subparagraph (A)-- (I) by striking ``in any case'', and (II) by inserting ``only'' before ``if the taxpayer's'', and (iii) by striking subparagraph (B) and inserting the following new subparagraph: ``(B)(i) an Internal Revenue Service audit of the taxpayer-- ``(I) was conducted solely for employment tax purposes not more than 3 years before such period, and ``(II) included an examination for employment tax purposes of individuals holding positions substantially similar to the positions held by the individual involved, ``(ii) upon completion of such audit the taxpayer was notified in writing by the Internal Revenue Service that the treatment for employment tax purposes of the individuals referred to in clause (i)(II) was correct, and ``(iii) such notification is not revoked before such period; or''. (B) Conforming amendment.--Subparagraph (A) of section 530(e)(2) of the Revenue Act of 1978 (as amended by section 1121 of the Small Business Job Protection Act of 1996) is repealed. (c) Termination of Treatment of Certain Technical Personnel.-- Subsection (d) of section 530 of the Revenue Act of 1978 is repealed. (d) Authority for Regulations and Rulings on Employment Status.-- Subsection (b) of section 530 of the Revenue Act of 1978 is repealed. (e) Payors To Notify Service Providers of Consequences of Employment Status.-- (1) Section 6041 of such Code (relating to information at source) is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: ``(e) Additional Information Required To Be Included on Statements Covering Payments for Services.--In the case of a statement required under subsection (d) with respect to any payment for services, such statement shall be treated as not satisfying the requirements of subsection (d) unless such statement includes the following information: ``(1) The payor is treating the payee as not being an employee and the payee may be liable for self-employment tax. ``(2) If the payee believes that he should properly be treated as an employee, an explanation of the procedure for obtaining Internal Revenue Service review of his status. ``(3) The payee will not be eligible for any employee fringe benefits and may lose protections or benefits under Federal laws relating to fair labor standards, occupational health and safety, civil rights, unemployment insurance, and worker's compensation. ``(4) An explanation of tax benefits to the self-employed such as retirement plans and deduction for a portion of the cost of health insurance.'' (2) Section 6041A of such Code (relating to returns regarding payments of remuneration for services and direct sales) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection: ``(f) Additional Information Required To Be Included on Statements.--In the case of a statement required under subsection (e), such statement shall be treated as not satisfying the requirements of subsection (e) unless such statement includes the information specified in paragraphs (1) through (4) of section 6041(e).'' (f) Effective Dates.-- (1) In general.--Except as provided in paragraph (2), the amendments made by this section shall take effect beginning on the date which is 120 days after the date of the enactment of this Act. (2) Modifications to safe harbor; termination of treatment of technical personnel.--The amendments made by subsections (b) and (c) shall apply to periods ending on or after the date which is 120 days after the date of the enactment of this Act. SEC. 3. CLASSIFICATION OF INDIVIDUALS AS EMPLOYEES FOR PURPOSES OF UNEMPLOYMENT COMPENSATION PROGRAM. (a) Uniform Federal and State Definition of Employee.--Subsection (a) of section 3304 of the Internal Revenue Code of 1986 (relating to requirements for approval of State unemployment compensation laws) is amended by striking ``and'' at the end of paragraph (18), by redesignating paragraph (19) as paragraph (18), and by inserting after paragraph (18) the following new paragraph: ``(19) the determination of whether an individual is an employee of another person shall be made in accordance with section 3306(i); and''. (b) Effective Date.-- (1) In general.--Except as provided in paragraph (2), the amendments made by this section shall take effect on the 180th day after the date of the enactment of this Act. (2) Special rule.--In the case of any State the legislature of which has not been in session for at least 30 calendar days (whether or not successive) between the date of the enactment of this Act and such 180th day, the amendments made by this section shall take effect 30 calendar days after the 1st day on which such legislature is in session on or after such 180th day.
summary: Misclassification of Employees Act - Amends the Internal Revenue Code to provide for the waiver of employment tax liability for employers for any period if: (1) the employer did not treat an individual as an employee for purposes of employment taxes; (2) the treatment of such individual was based on a reasonable good faith misapplication of the common law rules used for determining the employer-employee relationship; (3) Federal tax returns for such period were filed on a basis consistent with the treatment of such individual as not being an employee; (4) the employer (and any predecessor) did not treat any other individual holding a substantially similar position as an employee for employment tax purposes after December 31, 1977; and (5) the employer enters into a closing agreement with, and monitored by, the Secretary of the Treasury with respect to treating such individual as an employee. Amends the Revenue Act of 1978 (relating to controversies involving whether individuals are employees for purposes of employment taxes) to require an employer to have a reasonable basis for not treating an individual as an employee. Requires the use of a recent prior audit as a reasonable basis. Excludes certain skilled technical personnel from such tax treatment. Removes the prohibition against regulations and rulings on employment status. Amends the Internal Revenue Code to set forth additional information to be included on statements covering payments for services. Provides for the determination of whether an individual is an employee of another person for purposes of unemployment compensation.