If your business has been selected for an employment tax examination to determine whether you correctly treated certain workers as independent contractors, you may be entitled to Internal Code Section 530 relief. If you meet the relief requirements you won’t owe employment taxes for those workers.
If you don’t meet the relief requirements, the IRS will determine whether they are independent workers or employees and whether you owe employment taxes for those workers.
In order to receive relief, you must meet all three of the following requirements:
Reporting Consistency
Your business must have timely filed all required federal tax returns consistent with your treatment of each worker as not being an employee. You must have filed Form 1099-MISC for the worker.
Substantive Consistency
In addition, you (and any predecessor business) must have treated the workers, and any similar workers, as independent contractors.
Reasonable Basis
Finally, you must have had a reasonable basis for not treating the workers as employees. There a few ways you can show this:
- You reasonably relied on a court case about federal taxes or a ruling issued to you by the IRS; or
- Your business was audited by the IRS at a time you treated similar workers as indepdenent contractors and the IRS didn’t reclassify those workers as employees. You may not rely on an audit that started after December 31, 1996, unless the audit included an examination for employment tax purposes of whether the individual involved (or any other individual holding a substancially similar position) should be treated as your employee; or
- You treated the workers as independent contractors because you knew, and can substantiate, that was how a significant segment of your industry treated similar workers; or
- You relied on some other reasonable basis. For example, you relied on the advice of a business lawyer or accountant who knew the facts about your business
If you have questions whether your business can claim this relief, KRD tax professionals can help.
