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