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Contractor vs Employee
Section 530 Relief

© by Greta P. Hicks, CPA

Are you still having trouble with the IRS over the employee versus contractor issue? If so, Congress passed a bill which further explains how the Section 530 relief provisions are to be interpreted by the IRS. Over the past 18 years the IRS had gradually made it near impossible for a company to qualify under any of the Section 530 provisions.

Basic old law. Section 530 allows employers to escape employment tax liability for workers if the following conditions are met:

  1. The employer always treated the worker as an independent contractor.
  2. The employer filed all returns (including information returns) required for the worker for all period after 1978 and the returns were all consistent with independent contractor status; and
  3. The employer had a reasonable basis for treating the workers as an independent contractor.

Reasonable basis included reliance on any of the following:

  1. Judicial precedent, published rulings, or technical advice or letter ruling to the employer;
  2. A past IRS audit in which no assessment was made on account of improper treatment of the workers; or
  3. A long-standing recognized practice of a significant segment of the industry in which the individual worked.

Reasonable Basis Refined By Congress

Reliance On Prior Audit

IRS interpretation: The IRS said that employers would not be able to rely on such an audit unless it included an examination for employment tax purposes of whether the worker involved (or worker holding a similar position) as properly classified.

New law: The employer can rely upon a prior audit even though they were not related to employment tax matters.

Long-Standing Practice

IRS interpretation: The IRS sought to require 10 years standing or sought to require that the practice was in existence before 1979. Also they sought to require a showing of more than 50 percent of an industry treated the workers as contact.

New law: Status that no fixed length time will be required and in no case will an employer be required to show that the practice is followed by more than 25% of the industry.

Burden Of Proof

IRS interpretation: The IRS took the position that the employer had the final burden of proof to show industry practice.

New law: The employers will have the burden only of establishing a prima facie case. If the employer cooperates with the IRS investigation, the IRS will bear the burden of proving the employer wrong.

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GRETA P. HICKS, CPA and former IRS manager, concentrates in solutions to IRS problems and advises business and tax professional on IRS policies and procedures. Ms Hicks is owner of TAX SOLUTIONS, Inc., a company providing educational materials and programs on solutions to IRS problems and is a nationally known speaker and writer on solutions to IRS problems. To arrange for consultation contact: Greta's web site:


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