Section 1706 of the 1986 Tax Reform Act

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. For information on how these laws affect technical services workers and their clients, read our discussion here.

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.

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