IRS Section 530 Requirements for Independent Contracotors

Allowing Your Business to Continue Treating Workers as Independent Contractors

Section 530 Relief for Independent Contractors
Section 530 Relief for Independent Contractors. Hero Images/Getty Images

The IRS audits businesses to be sure they are not incorrectly mis-classifying workers as independent contractors instead of employees. This mis-classification is an issue because independent contractors do not have employment taxes withheld and other taxes are not paid for contractors that are paid for employees.

The IRS assumes that a worker should be classified as an employee unless the employer can prove otherwise.

There is one exception to this rule: If the employer can meet special requirements to avoid classifying workers as employees and paying employment taxes on their wages. This relief is discussed in Section 530 of the Internal Revenue Code.

Section 530 of Internal Revenue Code
Section 530 of the Internal Revenue Code (PDF) discusses "Controversies Involving Whether Individuals are Employees for Purposes of Employment Taxes." Provisions contained in section 530 of the Revenue Act of 1978 relieve employers from paying employment taxes on workers previously treated as independent contractors and for whom the company was not paying employment taxes. Section 530 established a "safe harbor" for employers; under this provision, a company is not liable for employment taxes if it can demonstrate a reasonable basis for treating workers as independent contractors and if the employer can meet all of three reasonable basis standards.

Section 530 Relief Requirements (PDF) (all three requirements must be met to receive relief:

  1. Reasonable Basis.
    You must have a reasonable basis for not treating the workers as employees. This reasonable basis might be established by:
    • A related court case or ruling by the IRS
    • A previous IRS audit that included an examination of employment taxes at a time when you treated similar workers as independent contractors and which did not result in IRS reclassification of these workers.
    • You can show that a significant segment of your industry treated similar workers as independent contractors,
    • You relied on some other reasonable basis, like the advice of a business attorney or accountant who knew the facts about your business.
  1. Substantive Consistency In addition, you and any predecessor employers must have treated the workers and any similar workers ONLY as independent contractors. If you treated similar workers as employees, this relief is not available.
  2. Reporting Consistency
    Finally, you must at all times have filed all federal tax returns consistent with your treatment of the workers as independent contractors and not employees. This treatment would include giving the workers Form 1099-MISC as annual wage summaries, and not at any time W-2s. (Read more about the difference between Form 1099-MISC and Form W-2). Relief is not available for any year and for any workers for whom you did not file the required information returns.

An Example
Here is an example to help you determine if you might be eligible for relief: An employer had been paying workers as independent contractors and not paying employment taxes for these workers. It provided each worker a Form 1099 each year. The employer was able to be relieved of the obligation of paying the IRS the employment taxes because it met all three requirements: It had a reasonable basis for treating workers as independent contractors (it was the industry standard), It treated all similar workers as independent contractors, and It consistently filed all returns as required.

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