Section 530 of the Revenue Act of 1978 offers taxpayers relief from federal employment tax obligations if certain statutory requirements are met. This relief may apply to government entities depending on if they have a Section 218 agreement, or are a federal agency.
IRC Section and Treas. Regulation
- Section 530 of the Revenue Act of 1978
- Section 530 is not part of the IRC, though some publishers include its text after IRC 3401.
Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)
- Section 530 of the Revenue Act of 1978, as amended
- Rev. Proc. 85-18; 1985-1 C.B. 518
- IRM 188.8.131.52
- TAM 9336005
- PMTA 2013-017
- Publication 1976, Do you Qualify for Relief Under Section 530? (Must be provided to the taxpayer at the start of a worker classification audit)
1. What is Section 530 relief?
Section 530 provides taxpayers relief from federal employment tax obligations if three statutory requirements are met: 1) reporting consistency; 2) substantive consistency; and 3) reasonable basis. Section 530 relief doesn’t extend to the worker, who may be liable for the employee share of Federal Insurance Contributions Act (FICA) tax or self-employment tax depending on whether they are an employee or independent contractor.
The taxpayer doesn’t need to claim Section 530 relief for it to apply. Examiners must first explore Section 530’s applicability even if the taxpayer does not raise the issue. (Section 530(e)(1) and IRM 184.108.40.206).
For Section 530 to apply, a worker doesn’t have to be an employee of the taxpayer (Section 530(e)(3)); nor does the business have to concede or agree that the workers are employees.
2. What if the worker is a Section 218 employee?
IRM 220.127.116.11 states the Social Security Administration (SSA) is the arbiter of coverage issues relating to Section 218 Agreements.
SSA is responsible for determining coverage of state and local government workers under a state’s Section 218 Agreement. If the SSA determines a worker is covered under the Section 218 Agreement, the IRS is responsible for determining wages for FICA tax purposes and the liability for FICA taxes. See IRC 3121(d)(4). If the SSA determines a worker is not covered under the Section 218 Agreement, the IRS determines whether the worker is an employee under the usual common law rules. See IRC 3121(d)(2).
Because of the differing statutory definitions of employee under the FICA and the Collection of Income Tax at the source, if the requirements of Section 530 are met, state and local employers may obtain Section 530 relief for income tax withholding liability, but not social security and Medicare tax withholding. What does this mean in an audit where a worker might be covered by a 218 agreement? Auditors must follow the directions of IRM 4.90.1 and the memorandum of understanding between IRS and SSA. This will result in SSA’s determination of whether the worker is covered by the Section 218 Agreement. If SSA determines the worker is covered by the Section 218 Agreement, the worker is an employee for FICA tax purposes. The auditor would make the social security and Medicare tax adjustments and consider the application of 3509 rates. If the employer meets the requirements for Section 530 relief, the employer gets Section 530 relief for income tax withholding, but not for social security tax and Medicare tax.
Prospectively, the employer would lose Section 530 relief. The employer would be required to withhold and pay social security and Medicare tax and report these amounts on Forms 941 and Form W-2 for future years. By doing so, the employer would fail the reporting consistency and substantive consistency requirements, and would no longer qualify for Section 530 relief. The employer would be required to withhold income tax prospectively.
3. What if the employer is a federal agency?
The IRS has consistently practiced that Section 530 does not apply to federal agencies (see PMTA 2013-017). Nothing in its legislative history indicates that Congress intended Section 530 to apply to federal agencies. When Section 530 was enacted in 1978, Congress didn’t consider its application to federal agencies because federal agencies were generally not subject to the FICA tax. Section 3402(d) mitigated the consequences of failure to withhold income tax, and the IRS didn’t have a program for auditing federal agencies. Later, Section 530 amendments, including those made after the 1983 legislation, which extended social security coverage to new federal employees, didn’t extend the application of Section 530 to federal agencies.
Issue Indicators or Audit Tips
- If the governmental entity is a federal agency, Section 530 relief is not available.
- Review the entity’s Section 218 agreement.
- Review the Memo of Understanding with the SSA.
- Identify workers with no FICA, Medicare, or federal income tax (FIT) withheld.
- Determine classification of workers who don’t have FICA, Medicare, or FIT withheld.
- First consider Section 530 relief on all worker reclassification audits.
- Continue the audit for FICA and Medicare taxes if the employer is entitled to Section 530 relief for a class of workers and the workers are covered by a Section 218 agreement. Section 530 doesn’t apply to classes of workers covered by a 218 agreement. An adjustment for income tax withholding wouldn’t be made since the class of workers would be covered by the Section 530 relief for the income tax.
- Discontinue the audit of that class of workers if the employer is entitled to Section 530 relief for that class and the workers are not covered by a 218 agreement. By discontinuing, IRS doesn’t make a determination on whether that class of worker consists of employees or independent contractors. If either or both the reporting and substantive consistency rules are not met, the taxpayer is not entitled to Section 530 relief even if it meets the requirements of reasonable basis.
- Taxpayers must cooperate fully with reasonable requests from the examiner in order to shift the burden of proof on the taxpayer’s entitlement to Section 530 relief to the IRS.