As the IRS continues to focus on worker classification, it has become increasingly
important that eligible businesses take precautionary steps to ensure compliance with
Section 530 to avoid a costly reclassification. Section 530 of the Revenue Act of
1978 (not part of the Internal Revenue Code) allows the business to treat a worker as
an independent contractor (i.e., as not being an employee) for employment tax
purposes regardless of the worker's status under the common law control rules. Many
businesses rely on Section 530 relief to provide protection.
Section 530 relief is available only if the business meets all the following
- Files all information returns (i.e., Form 1099-MISC) for the workers or classes
of workers at issue for the current year.
- Has not and will not treat the workers at issue (or classes of workers performing
substantially similar job positions) as employees on income tax returns, payroll
tax returns, or other returns filed by the business during the year.
- Has a reasonable basis for treating the workers as independent contractors. The
law provides certain safe harbors to meet this requirement, or the business can
rely on some other reasonable basis.
These requirements must be met each year. If the company fails to file Form 1099-MISC
on a worker, it loses Section 530 relief for that worker for that year. More
importantly, if the business fails to treat the worker (and workers performing
substantially similar job positions) as an independent contractor during a particular
year, it loses the Section 530 relief (for the year of violation and for all
subsequent years) for the entire class. Thereafter, the company cannot obtain Section
530 relief for that class of workers.
Consistency in treatment and information is the key. A business that wants to use the
Section 530 rules to classify workers must be aware of the importance of consistent
treatment across the years and throughout the ranks of workers holding substantially
similar positions. Treating even one worker as an employee can eliminate Section 530
treatment for all workers within the same class.
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distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014