As the IRS continues to focus on worker classification, it has become increasingly important that eligible businesses take precautionary steps to ensure compliance with Section 530 to avoid a costly reclassification. Section 530 of the Revenue Act of 1978 (not part of the Internal Revenue Code) allows the business to treat a worker as an independent contractor (i.e., as not being an employee) for employment tax purposes regardless of the worker’s status under the common law control rules. Many businesses rely on Section 530 relief to provide protection.
Section 530 relief is available only if the business meets all the following requirements:
1. Files all information returns (i.e., Form 1099-MISC) for the workers or classes of workers at issue for the current year.
2. Has not and will not treat the workers at issue (or classes of workers performing substantially similar job positions) as employees on income tax returns, payroll tax returns, or other returns filed by the business during the year.
3. Has a reasonable basis for treating the workers as independent contractors. The law provides certain safe harbors to meet this requirement, or the business can rely on some other reasonable basis.
These requirements must be met each year. If the company fails to file Form 1099-MISC on a worker, it loses Section 530 relief for that worker for that year. More importantly, if the business fails to treat the worker (and workers performing substantially similar job positions) as an independent contractor during a particular year, it loses the Section 530 relief (for the year of violation and for all subsequent years) for the entire class. Thereafter, the company cannot obtain Section 530 relief for that class of workers.
Consistency in treatment and information is the key. A business that wants to use the Section 530 rules to classify workers must be aware of the importance of consistent treatment across the years and throughout the ranks of workers holding substantially similar positions. Treating even one worker as an employee can eliminate Section 530 treatment for all workers within the same class.