Independent Contractor or Employee? – Section 530 Safe Harbor Part II

This is the ninth post in the Independent Contractor/Employee series. This series is dedicated to presenting individuals, sole proprietorships, and small to large businesses with a basic understanding of independent contractor issues.

To protect businesses from the effects of worker reclassification, Congress enacted Section 530 of the Revenue Act of 1978. Right to receive Section 530 relief is not dependent on common law employee status of workers.

When requesting Section 530 Safe Harbor status for an employer, consider the following information:

  1. The Internal Revenue Service must provide a written notice of the Section 530 provisions before a worker reclassification audit.
  2. Taxpayers may rely on past audits only if the audit covered specific employee/ independent contractor issues.
  3. If a taxpayer establishes a prima facie case that it meets the substantive and reporting consistency requirements and one of the reasonable basis safe harbors, and the taxpayer has fully cooperated with reasonable requests from the IRS, then the burden of proof with respect to Section 530 relief shifts to the IRS.
  4. Later treatment of worker as employee is permissible. The taxpayer may treat an individual who he or she has been treating as an independent contractor for prior years as an employee for more recent years without losing his or her ability to apply Section 530 to the earlier independent contractor status.