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Section 530 And IRS Employment Tax Audits: Worker Classification And Relief

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

Written by Matthew Roberts | Posted in IRS Employment Tax Audits • Section 530

The IRS and employers often are at loggerheads over the classification of workers as employees or independent contractors. Typically, many employers want to to treat workers as independent contractors, while the IRS often determines that workers are misclassified employees. Sometimes, the issue winds up in the courts.

Fortunately, there might be a way for employers to obtain a measure of protection if the IRS challenges the classification of a worker or workers. With “Section 530 relief,” an employer may avoid adverse tax consequences from a misclassification of employment status. However, this special safe-harbor rule is only available if the employer can show it had a reasonable basis for treating workers as independent contractors.

A Brief History of Section 530

As we stated in the main article, Section 530 is part of the Revenue Act of 1978. Initially, it was scheduled to expire on December 31, 1979. After then being extended twice, it was made permanent by the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982.

In 1996, a paragraph was added to the existing Section 530 provision, requiring the IRS to inform an employer about the safe-harbor rule, when appropriate. This notification must be provided before the IRS begins an audit of the employment status of an employer’s workers.
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Written by William Rogers | Posted in Section 530 • Worker Classification