Owe Taxes for Misclassified Workers? Section 530 to the Rescue!
As a business owner, you are obligated to collect and remit payroll taxes for your employees. But you are not required to collect and remit payroll taxes for independent contractors.
That’s why it’s important to correctly classify workers as either employees or independent contractors.
But here’s the problem: the rules for correctly classifying workers as either employees or independent contractors are unclear and confusing.
And what happens if you misclassify a worker as an independent contractor? Then you can find yourself owing hundreds of thousands of dollars in back employment taxes, penalties, and interest.
But wait! If this happens to you, the safe harbor of Section 530 may provide relief.
The Section 530 safe harbor was passed by Congress as part of the Revenue Act of 1978 in response to complaints by business owners that the IRS was being too aggressive in reclassifying their workers as employees.
The possible good news for you is that the Section 530 safe harbor prevents the IRS from retroactively reclassifying your independent contractors as employees and subjecting you to federal employment taxes, penalties, and interest.
Reclassifications, if any, go forward only. You are not on the hook for any money as of the date of any reclassifications.
To qualify for the Section 530 safe harbor, you must meet all the following requirements:
- You must have filed all federal tax and information returns consistent with treating the individuals as independent contractors.
- You must show that you never treated the individuals in question, or other workers in substantially similar positions, as employees for federal employment tax purposes.
- You must show that you had a reasonable basis for classifying the individuals as independent contractors.
You can meet the reasonable basis requirement by showing that you relied on any one of a number of authorities, including judicial precedents or administrative rulings, a prior worker classification tax audit, or industry practice.
Your classifications of workers for federal purposes do not have to match your classifications for state law purposes.
If you would like to discuss worker classifications, please contact me.