Independent contractors and Section 530 relief

There are a number of intricacies when it comes to Internal Revenue Service (IRS) tax law. One of the bigger problems that businesses run into is misclassification of employees. While classifying an individual as an independent contractor rather than an employee can save a business on tax withholdings, thereby shifting that burden to the contractor, an improper classification can lead to owed back taxes and significant penalties.

If you’re worried about whether workers have been misclassified, then you may want to look at the factors considered by the IRS when determining whether an individual is an employee or an independent contractor. There are three main factors that are considered in this determination, including behavioral control, financial control and the relationship between the parties. Although there is a form that can be utilized to determine how the IRS will classify a worker before making that determination on one’s own, there may be relief even if the IRS swoops in, find misclassification has occurred, and levies penalties and back taxes.

The most effective relief comes from Section 530 of the tax code. This section creates a safe harbor that allows employers to avoid back taxes and penalties if they can show the presence of three elements. First, an employer must demonstrate that there was a reasonable basis for classifying the worker as an independent contractor, such as similar classification by others in the industry or reliance on an IRS court case. Second, an employer must show that the worker or workers in question were consistently treated as independent contractors, which means that the IRS will look to see how predecessors treated those same individuals. If they were once treated as employees under the same circumstances, then Section 530 relief cannot be obtained. Lastly, an employer must demonstrate that the worker or workers in question were reported to the IRS consistently, meaning that they were always reported as independent contractors and never given W-2s like an employee.

Tax legal issues like this can be enormously complicated, and there can be a lot at stake. This is why it is often best to confront these matters only when one has a skilled legal advocate on his or her side. Fortunately, experienced legal professionals stand ready to assist in these matters.