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Worker Reclassification – Section 530 Relief

Section 530 of the Revenue Act of 1978 provides businesses with relief from federal employment tax obligations if certain statutory requirements are met.

IRC Section and Treas. Regulation

Section 530 is not part of the IRC, though some publishers include its text after IRC Section 3401.

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

  • Section 530 of the Revenue Act of 1978
  • Section 1706 of the Tax Reform Act of 1986
  • Section 1122 Small Business Job Protection Act of 1996
  • Rev. Proc. 85-18; 1985-1 C.B. 518
  • Rev. Rul. 83-16, 1983-1 C.B. 235
  • Rev. Rul. 84-161, 1984-2 C.B. 202
  • Rev. Rul. 81-224, 1981-2 C.B. 197
  • IRM 4.23.5.2
  • Publication 1976, Do you Qualify for Relief Under Section 530? (Must be provided to the taxpayer at the start of a worker classification audit).

Analysis

What is Section 530 relief?

Section 530 provides employers with relief from federal employment tax obligations if three statutory requirements are met: 1) reporting consistency; 2) substantive consistency; and 3) reasonable basis. Section 530 does not extend to the worker, who may still be liable for the employee share of FICA, not self-employment tax.

It is not necessary for the business to claim section 530 relief for it to be applicable. IRM 4.23.5.2 provides that examiners must first explore the applicability of section 530 even if the taxpayer does not raise the issue.

Section 530(e) provides that a worker does not have to be an employee of the business in order for relief to apply. It is not necessary for the business to concede or agree that the workers are employees in order for section 530 relief to be available.


The 3 Statutory Requirements That Must Be Met.

Reporting Consistency – The taxpayer must have timely filed the requisite information returns consistent with its treatment of the worker as a non-employee. (For example, if the taxpayer claims the worker is an independent contractor, Forms 1099 must have been filed for the taxable years at issue). If no information return requirement exists, relief will not be denied on the basis that the return was not filed. (For example, if the taxpayer claims the worker was a volunteer, no information returns would be required). See: Rev. Proc. 85-18, 3.03(B); Rev. Rul. 81-224.

Substantive Consistency – If the taxpayer or predecessor treated the worker, or any worker holding a substantially similar position, as an employee at any time after December 31, 1977, the taxpayer will not be eligible for relief. See: Section 530(e)(6); Rev. Proc. 85-18; Rev. Rul. 83-16, Rev. Rul. 84-161.

Reasonable Basis – The taxpayer must have relied on one of the following for purposes of treating the worker as a non-employee: 1) prior audit; 2) judicial precedent; 3) industry practice; or 4) other reasonable basis. Reasonable basis requirement is to be liberally construed..

Prior Internal Revenue Service examination -

After December 31, 1996, audit must have included an examination for employment tax purposes of the status of the class of workers at issue or a substantially similar class of workers.

Before January 1, 1997, the IRS audit does not have to have been an audit for employment tax purposes as long as the audit entailed no assessment attributable to the taxpayer’s treatment, for employment tax purposes, of workers holding positions substantially similar to the position held by the workers whose treatment is at issue.

Federal judicial precedents and administrative rulings -

The facts in the case must be similar to the situation of the taxpayer at hand.

The judicial precedent or published ruling must have been in existence at the time the taxpayer began treating workers as non-employees. One case is sufficient to establish a precedent that creates a safe haven. This is true even if case law can be found to support either side of the non-employee/employee issue.

State court decisions and rulings of agencies other than IRS do not constitute judicial precedent. (However, such reliance may fall under the other reasonable basis safe haven).

Industry Practice –

The taxpayer must show reasonable reliance on a long-standing recognized practice of a significant segment of its industry. An industry generally consists of firms located in the same geographic or metropolitan area which provide the same product or service and compete for the same customers.

Other Reasonable Basis –

A taxpayer that fails to meet any of the three “safe havens” may still be entitled to relief if it can demonstrate that it relied on some other reasonable basis for not treating a worker as an employee.


Who is Covered by Section 530?

Section 530 relief applies to all employees under IRC Section 3121(d), including corporate officers and statutory employees. It does not apply to workers covered under a 218 agreement for FICA tax, but does apply for income tax withholding. It does not apply to third party arrangements for engineers, designers, drafters, computer programmers, systems analysts or other similarly skilled workers.

Issue Indicators or Audit Tips

Section 530 relief must be considered first on all worker reclassification audits.

If the employer is eligible for section 530 relief, the examiner is to discontinue the examination with regard to the qualified occupation. This discontinuance means that the worker status has not been determined as to whether the occupation class is that of employee or independent contractor.

If either or both of the reporting and substantive consistency rules are not met, the business is not entitled to section 530 relief even if it meets the requirements of reasonable basis.

Businesses seeking section 530 relief must cooperate fully with reasonable requests from the examiner in order to shift the burden of proof to the Service.