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.