8730 / Are there any safe harbor provisions that an employer can use in order to ensure that its independent contractors are properly classified so that they will not retroactively be deemed employees?

Although it has not been incorporated into the Internal Revenue Code, Section 530 of the Revenue Act of 1978 provides a limited safe harbor for employers to prevent the IRS from retroactively reclassifying certain independent contractors as employees.¹ The purpose of the safe harbor rule is to prevent reclassification in situations where an employer has a reasonable basis for classifying an individual as an independent contractor.

An employer must satisfy three tests in order to qualify for relief under the Section 530 safe harbor:

(1)  The employer must have a reasonable basis for treating the individual as an independent contractor (the “reasonable basis” requirement (see Q 8731));

(2)  The employer must consistently treat all similarly-situated workers as independent contractors (the “substantive consistency” requirement); and

(3)  All tax returns must have been filed on a basis consistent with independent contractor classification (the “reporting consistency” requirement).² The Tax Court has found that the untimely filing of a taxpayer’s Forms 1099 would not preclude relief under Section 530.³

Whether the requirements of Section 530 have been satisfied is a question of fact to be decided by the courts. The employer has the burden of proof in showing that it is entitled to relief pursuant to the safe harbor provision.