Independent Contractor vs. Employee: The Basics (Part 2 of 3)

Section 530

Congress directed IRS not to reclassify workers as employees when a company demonstrates a good faith believe that its workers were independent contractors.

These rules, referred to Section 530, were not incorporated into the Internal Revenue Code, but, nevertheless, remain part of the law and are critical in protecting companies against a reclassification.

Section 530 is available to companies that treated workers as independent contractors, if –

  1. The company always treated the particular worker as an independent contractor and the general class of workers performing similar work as independent contractors;
  2. After 1978, the company filed all returns (including information returns) required for the worker and all such returns were consistent with independent contractor status; and
  3. The company had a “reasonable basis” for treating the worker as an independent contractor.

Safe Harbors

In general, there are three safe harbors under Section 530:

  1. A judicial precedent, published rulings or technical advice or letter ruling to the employer;
  2. A prior IRS audit in which no assessment was made on account of improper treatment of the worker; or
  3. A long-standing recognized practice of a significant segment of the industry in which the individual worked.
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