What Is the Section 530 Safe Harbor?
It can cost you a bundle if you misclassify a worker as an independent contractor instead of an employee for federal employment tax purposes–unless you qualify for the Section 530 safe harbor.
The IRS can make you pay back payroll taxes plus penalties—in some cases, these can equal 40 percent of gross payroll or more. That’s the bad news.
The Good News:
Hiring firms have a “get out of jail free” card—the Section 530 safe harbor.
If your company qualifies for Section 530 relief, the IRS can’t impose assessments or penalties for worker misclassification, and you may continue to treat the class of workers involved as independent contractors for employment tax purposes. This is so even if you should have classified the workers as employees under the regular IRS common law test.
What’s the Catch?
The catch is that it can be hard for a hiring firm to qualify for Section 530.
You must satisfy three requirements to qualify for Section 530 relief:
- You must have filed all required Form 1099-NEC returns (or other required information returns) for the workers involved.
- You must have treated all workers doing substantially similar work consistently as independent contractors.
- You must have a reasonable basis for treating the workers as independent contractors, such as a legal case, prior IRS audit, or long-standing practice in the industry.
What’s Changing Under the New IRS Rules?
For the first time in 40 years, the IRS has issued a new revenue procedure updating how it should apply Section 530. Unfortunately, the new procedure can make it harder for hiring firms to qualify for Section 530 relief.
The IRS says that in making its determination of whether a hiring firm has a reasonable basis for classifying its workers as independent contractors, it may consider whether the firm treated the workers as employees for non-tax purposes. These include federal or state labor law, state unemployment insurance, or workers’ compensation insurance coverage.
This can be problematic for hiring firms. There are various reasons why a firm might treat a worker as an employee for non-tax purposes—reasons that have nothing to do with whether the firm reasonably believed the worker qualified as an independent contractor for IRS purposes.
The IRS’s new approach makes it more important than ever for hiring firms that use independent contractors to plan ahead to ensure that they qualify for Section 530 relief. Hiring firms must document that they qualify for relief when they classify the workers as independent contractors. You can’t wait until you are audited, and the IRS questions your worker classification practices, to think about Section 530.
How We Can Help
Sterling Tax and Accounting is here to help your business with tax planning! Our comprehensive approach to tax planning helps reduce your overall tax liability and keep more money in your pocket. If all your accountant does is file your taxes, chances are they are making you pay more than your fair share of taxes.
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