Section 530 Relief from Employment Taxes

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Definition:

Provisions contained in section 530 of the Revenue Act of 1978 relieve employers from paying employment taxes on workers previously treated as independent contractors and for whom the company was not paying employment taxes. Section 530 established a "safe harbor" for employers; under this provision, a company is not liable for employment taxes if it can demonstrate a reasonable basis for treating workers as independent contractors and if the employer can meet all of three reasonable basis standards.

What is a "Reasonable Basis"?
In general, a business can be relieved of certain federal employment tax obligations if it:

  • had a reasonable basis for not treating workers as employees,
  • was consistent in its treatment of any similar workers as contractors, and
  • consistently filed required information returns with the IRS.

Also Known As: safe harbor

Examples:

An employer had been paying workers as independent contractors and not paying employment taxes for these workers. It provided each worker a Form 1099 each year. The employer was able to be relieved of the obligation of paying the IRS the employment taxes because it met all three requirements:

  • It had a reasonable basis for treating workers as independent contractors (it was the industry standard)
  • It treated all similar workers as independent contractors, and
  • It consistently filed all returns as required.
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