The following is the complete text of IRS Section 1706, defining the treatment of workers (such as contract engineers) for tax purposes. It is followed by a 
conference committee report regarding the intended interpretation of Section 1706 and the relevant parts of Section 530, as amended.
SEC. 1706. TREATMENT OF CERTAIN TECHNICAL PERSONNEL.
(a) IN GENERAL - Section 530 of the Revenue Act of 1978 is amended by adding at the end thereof the following new subsection:
"(d) EXCEPTION. - This section shall not apply in the case of an individual who pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work."
(b) EFFECTIVE DATE. - The amendment made by this section shall apply to remuneration paid and services rendered after December 31, 1986.
Note:
- "another person" is the client in the traditional job-shop relationship.
- "taxpayer" is the recruiter, broker, agency, or job shop.
- "individual", "employee", or "worker" is you.
Conference Committe Report on Section 1706 of the 1986 Tax Reform Act
5. Treatment of certain technical personnel
Present Law
Section 530 of the Revenue Act of 1978, as amended, provides generally that taxpayers who in the past had a reasonable basis (such as past industry practice) for not treating workers as employees may continue such treatment under certain circumstances, without incurring employment tax liabilities.
House Bill
No provision.
Senate Amendment
The Senate amendment provides that section 530 of the Revenue Act of 1978 does not apply in the case of an individual who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. This provision is effective for services performed after the date of enactment. By virtue of the exception to section 530 of the 1978 Act provided under the Senate amendment, the prohibition against issuance of regulations or rulings concerning employment tax status in section 530 of the 1978 Act does not prohibit issuance of regulations or rulings with respect to the employment tax status of individuals with respect to whom the Senate amendment applies.
Under the Senate amendment, it is intended that certain individuals retained by firms providing technical services are classified, for income and employment tax purposes, as employees or as independent contractors under the generally applicable common law (nonstatutory) standards without regard to section 530 of the Revenue Act of 1978. Technical services firms have retained engineers, designers, drafters, computer programmers, systems analysts, and other similarly skilled personnel who are engaged in lines of work similar to those listed for assignments for clients of the technical services firms. Some of these individuals have taken the position that they should be treated as independent contractors, which would relieve the technical services firms of the obligation to withhold income and employment taxes from their earnings.
The Senate amendment applies whether the services of such individuals are provided by the firm to only one client during the year or to more than one client, and whether or not such individuals have been designated or treated by the technical services firm as independent contractors, sole proprietors, partners, or employees of a personal service corporation controlled by such individual. The effect of the provision cannot be avoided by claims that such technical service personnel are employees of personal service corporations controlled by such personnel. For example, an engineer retained by a technical services firm to provide services to a manufacturer cannot avoid the effect of this provision by organizing a corporation that he or she controls and then claiming to provide services as an employee of that corporation.
This provision does not affect the application of Code section 414(n), relating to employee leasing, to technical services personnel in circumstances where that provision applies under present law.
Also the provision does not apply with respect to individuals who are classified, under the generally applicable common law standards, as employees of a business that is a client of the technical services firm.
Conference Agreement
The conference agreement follows the Senate amendment with a technical modification clarifying the language of the Senate amendment to conform to the language of section 530 of the Revenue Act of 1978 and with an amendment to the effective date. The conferees further clarify that the provision does not affect the application of the Treasury's authority under Code section 414(o) to prevent avoidance of certain employee benefit requirements. The conferees believe that the provision will provide more consistent tax treatment of individuals performing services in the technical service industry.
The conference agreement is effective for remuneration paid and services performed after December 31, 1986.
The IRS considers the existence of an employer-employee relationship to depend on whether the worker is subject to the will and control of the employer, based on the following factors:
- Instructions. Employees typically must follow instructions as to when, where, and how to perform the job.
- Training. Requiring training supports employee status.
- Integration. Integration of the worker's services into the business operations suggests that the hirer directs and controls the worker.
- Services rendered personally. If services must be rendered personally by a specific worker, the hirer controls the methods used to complete the work.
- Control of assistants. Control by the hirer over the hiring, supervision, and pay of assistants implies employee status.
- Ongoing relationship. A continuing relationship suggests that an employer-employee relationship exists.
- Set hours of work. The establishment of set hours by the hirer implies control over the worker.
- Full time work. A worker who must devote full working time to the hirer is being controlled.
- Work on hirer's premises. On-premises work indicates employer control, especially when the work could be done elsewhere.
- Order or sequence. Work that must be performed in an order or sequence established by the hirer suggests control.
- Reports to hirer. A requirement that the worker submit regular oral or written reports to the hirer implies control.
- Payment method. Payment by the hour, week, or month generally indicates an employer-employee relationship. Payment by the job or commission indicates independent contractor status.
- Payment of expenses. Payment of the worker's business or travel expenses suggests an employer-employee relationship; the hirer is regulating and directing the worker's activities.
- Furnishing tools, materials. Provision of tools, materials, and other equipment by the hirer shows an employer-employee relationship.
- Significant investment. Independent contractor status is implied if the worker invests in the facilities used for the work. Absence of investment indicates an employer-employee relationship.
- Realization of profit or loss. A worker who can realize a profit or suffer a loss as a result of providing services is usually an independent contractor.
- Serving more than one firm. A worker who provides services to several unrelated firms at the same time generally is an independent contractor.
- Serving the public. A worker whose services are regularly available to the general public is an independent contractor.
- Right to discharge. The right of the hirer to discharge the worker at any time is a factor indicating an employer-employee relationship. But, an independent contractor may not be fired if his result meets contract specifications.
- Right to quit. A worker with the right to terminate the relationship with the hirer at any time without liability is generally an employee.
The presence or absence of any one of the 20 factors is not determinative or conclusive; rather the IRS will consider all of the factors affecting the relationship.
(Nov. 2, 2009), by Staffing Industry Analysis
FedEx Corp. said Friday an Internal Revenue Service audit team now says the company won't have to pay a tax assessment in regard to FedEx Ground's independent contractors for the 2002 calendar year.
FedEx reported in September that the IRS was considering charging the company $14 million in taxes and penalties plus interest over the use of independent contractors in its FedEx Home Delivery service for 2002. Most of the proposed assessment had related to employment and withholding taxes.
"We are pleased with the IRS audit team's decision not to assess any tax or penalty with respect to any of FedEx Ground's independent contractors, including our FedEx Home Delivery independent contractors," according to FedEx.
Similar issues remain under audit for 2004 through 2008, but the company said it believes the audit team should reach the same conclusion for those years as well.
(Sep. 18, 2009), by Ryan J. Donmoyer, Bloomberg
The Internal Revenue Service will audit 6,000 U.S. companies to determine whether they pay all their required employment taxes to fund Social Security and Medicare benefits.
The IRS said the audits will provide data for its first statistical analysis since 1984 of how often companies misclassify workers to duck tax obligations, fail to pay taxes on fringe benefits such as personal use of company cars, and improperly pay taxes for company executives. The audits will begin in February, and the companies will be randomly chosen.
"We think businesses have significantly changed over the last 25 years," John Tuzynski, chief of employment tax operations at the IRS, said in an interview today. "This will help us find out where there are real issues we have to address."
The Treasury Department in 2005 estimated, based on the 1984 IRS data, that companies underpay employer taxes by about $14 billion annually. In particular, federal agencies have raised concerns about whether employers are properly classifying workers as company employees or independent contractors.
Employee misclassification "could be a significant problem with adverse consequences" because it cheats the government out of tax revenue and employees out of labor protection, the Government Accountability Office said last month. Employees who are improperly classified as independent contractors can be denied health benefits, overtime pay, and unemployment insurance.
Tuzynski said the IRS audits, to be conducted over three years, also will focus on fringe benefits such as company cars and personal use of corporate-owned vacation property, as well as the way salaries are reported for officers at so-called S- corporations.
Face-to-Face
Most of the audits will be conducted face-to-face, Tuzynski said, although the IRS also will gather information from internal sources and the Internet.
"We're going to try to make it as least burdensome as we can," he said.
Employers are required to pay half of their workers' 12.4 percent Social Security tax and 2.9 percent Medicare tax when the workers are classified as "employees." Workers classified as "independent contractors" pay the entire levy themselves.
The Bureau of Labor Statistics reported that 10.3 million workers, or about 7.4 percent of the workforce, were classified as "independent contractors" in 2005. It's unknown how many of those weren't properly classified as independent contractors.
States uncovered about 150,000 workers in 2007 who weren't receiving labor protection because they were misclassified, the GAO said. Improper worker classification costs state governments revenue used to pay unemployment benefits.
FedEx Corp. said on Sept. 11 that the IRS, following an audit of the company's 2002 taxes, is proposing to assess tax and penalties of $14 million related to the misclassification of employees as independent contractors. The company said it would contest the IRS's findings.
(Sep. 11, 2009), by StaffingIndustry.com
FedEx Corp. may face $14 million in taxes and penalties plus interest over use of independent contractors at its FedEx Home Delivery service for 2002, FedEx reported in a filing today with the U.S. Securities and Exchange Commission. Most of the proposed assessment relates to employment and withholding taxes for 2002.
FedEx said it will challenge the findings of the IRS audit, but a final resolution likely won"t happen for some time.
"We believe that we have strong defenses to the proposed assessment and will vigorously defend our position, as we continue to believe that all of FedEx Ground"s independent contractors, including those providing the FedEx Home Delivery service, are independent contractors," FedEx said in the filing.
The company said similar issues are under audit by the IRS for 2004 through 2008.
Memphis (Dec. 28, 2007), by WebCPA Staff
The Internal Revenue Service has told FedEx that it has been misclassifying its delivery drivers as independent contractors and is ordering the shipping company to pay back taxes and penalties.
FedEx revealed in a regulatory filing that it heard from the IRS on Dec. 20 that an audit team had concluded an audit for 2002 regarding the classification of its "pickup and delivery owner-operators" at FedEx Ground and determined that they should be reclassified as employees for federal income tax purposes. The IRS indicated to FedEx that it anticipated assessing tax penalties of $319 million plus interest for 2002. The IRS is also conducting audits for subsequent years.
But FedEx plans to challenge the ruling. "We believe that we have strong defenses to the IRS"s tentative assessment and will vigorously defend our position, as we continue to believe that FedEx Ground"s owner-operators are independent contractors," said the company. FedEx added that it cannot yet determine the amount it might potentially lose from the IRS decision.
The International Brotherhood of Teamsters, which has been trying to organize FedEx drivers, hailed the decision and estimated that the potential losses to FedEx could total over $1 billion. "It"s game over for FedEx"s independent contractor scam," said Teamsters general president Jim Hoffa in a statement.