8731 / How can an employer show that it had a reasonable basis for classifying its workers as independent contractors, rather than employees, in order to qualify for the Section 530 safe harbor?

An employer can avoid IRS reclassification of its independent contractors as employees if it is able to prove, among other requirements (see Q 8730), that it had a reasonable basis for its classification of workers.

The courts have found that the “reasonable basis” requirement is satisfied when the employer relies on one or more of the following:

(i)  judicial precedent, published rulings or IRS letter rulings to the taxpayer (IRS rulings addressed to other taxpayers have been found insufficient);¹

(ii)  a past IRS audit of the employer where there was no assessment attributable to the treatment of individuals holding positions similarly situated to the individual at issue for employment tax purposes;