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

This is the eighth 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.

A business can avoid reclassification if it meets the requirements of Section 530, as follows:

1. Has the business treated the individual or any other individual holding a substantially similar position as an employee during the period under examination or prior period? If yes, Section 530 does not apply.

2. Were all federal tax returns (including informational returns) required to be filed for the period under examination by the business, with respect to the individual, filed on a basis consistent with treating the individual as an employee? If no, Section 530 does not apply. If yes, and the answer to any of the following questions is yes, Section 530 may apply.

a. Is there judicial precedent or published ruling under which the individual may reasonably be considered as not being an employee?

b. Has technical advice or other determination been issued with respect to the business indicating the individual should not be treated as an employee?

c. Does the business have a letter ruling indicating the individual should not be treated as an employee?

d. Was there a prior examination for a period in which the business employed the individual in question and employment taxes were not an issue?

e. Is it a long-standing recognized practice of a significant segment of the industry to treat such individuals as not being employees?

f. Did the business have any other reasonable basis for treating the individual as no being an employee?

Determining whether a position is “substantially similar” to a position held by another individual who has been classified as an employee must include a consideration of the relationship between the taxpayer and those individuals, not just a comparison of the workers’ jobs.

The term “long standing practice” may not be construed as requiring that the practice must have continued for more than ten years. An industry practice in existence for a shorter period may still be considered long standing depending upon the facts of the case.

The term “significant segment” may not be construed to require a reasonable showing of the practice of more than 25 percent of the industry, without taking into account the taxpayer. This is merely a safe harbor, a lower percentage may still be a significant segment of the taxpayer’s industry depending upon the facts of the case.