Worker Classification and Section 530 Relief

Employers are required to pay employment taxes to the IRS.  Generally, these payments consist of two portions:  the employee’s portion of FICA and income taxes and the employer’s portion of FICA and unemployment (FUTA) taxes.  Employers who fail to timely remit employment taxes to the IRS run the risk of being held liable for not only the employment taxes, but also penalties and interest for late payment.

But independent contractors are treated differently than employees.  Specifically, if a worker is properly characterized as an independent contractor (as opposed to an employee), the taxpayer making payment to the independent contractor is not required to remit payment to the IRS.  Rather, the independent contractor—particularly in the case of an individual sole proprietorship—pays self-employment taxes on the business’s net income.

Because of the distinction, taxpayers generally prefer to treat their workers as independent contractors.  Conversely, the workers prefer employee treatment.  In most instances, the tie will go the taxpayer-payor, though, because the payor has more leverage over the characterization of the worker as an independent contractor or employee.  That is, at least via contract.

Of course, the IRS is well aware of taxpayers’ general inclinations to treat their workers as independent contractors.  Congress is too.  Accordingly, under federal tax law, the IRS has the authority to recharacterize workers as employees, even if the two agree that they should be treated as independent contractors.

Taxpayers in these situations are not without defenses.  Although there are many, a common defense that may be raised is Section 530 relief.  To the extent a taxpayer can convince the IRS Section 530 relief applies, the taxpayer can avoid costly employment taxes.  Moreover, the taxpayer can continue to treat their workers as independent contractors.  A brief summary of Section 530 relief is discussed below.

Common Law Factors (Employee v. Independent Contractor) Read More