This is the first article in a series dedicated to using Section 530 of the Revenue Act of 1978 as protection for businesses that have been using independent contractors, in good faith, but are now facing an IRS or State of Minnesota audit of that practice. Section 530 may be 34 years old, but it is still a viable option for many businesses.
Section 530 was enacted as part of the Revenue Act of 1978. At the time, many businesses believed the government was treating them unfairly in their use of independent contractors. The businesses believed their treatment of workers was consistent with what they saw as standard in their industry or was what the government or their employment or tax professionals had instructed them to do. To find them responsible for unpaid employment taxes, after the fact, was unfair. To correct this unfairness, Congress adopted Section 530 to terminate the business’s, but not the worker’s, employment tax liability under:
- Federal Insurance Contributions Act (FICA)
- Railroad Retirement Tax Act (RRTA)
- Federal Unemployment Tax Act (FUTA)
- Federal Income Tax Withholding (FITW)
- General provisions relating to employment taxes and collection of income taxes at the source plus interest and penalties attributable to the employment taxes. See Rev. Proc. 85-18, 1995-1 C.B. 518.
Businesses can also apply Section 530 to individuals who meet the statutory definition of employee as defined in IRC Section 3121(d). IRM 4.23.5.
Section 530 has never been codified as part of the Internal Revenue Code. Thus, it continues to be referred to as Section 530.
Section 1706 of the Tax Reform Act (TRA) of 1986 added subsection 530(d) to exclude certain workers from coverage if they are providing services to a client pursuant to an arrangement between the taxpayer and its client (three party arrangements). The covered workers include:
- Computer Programmer
- Systems Analyst
- Other similarly skilled workers engaged in a similar line of work.
These workers are not excluded from Section 530 safe harbor relief in the usual two-party employer and worker arrangement where the business hires the worker to perform services directly for the business.
The Small Business Protection Act of 1996 added Section 530(e) to mandate that the first step in any employment tax audit is to determine whether the business meets the requirements of Section 530. The examining agent must now give the taxpayer Publication 1976, Do You Qualify For Relief Under Section 530? (May, 2007), before the agent initiates any worker classification examination.
Section 530 safe harbor relief is also available in State of Minnesota worker classification examinations. Minnesota Statutes Section 290.92, subdivision 1, incorporates the federal definition of “wages” into Minnesota law. Included in the federal definition of “wages” is the Section 530 safe harbor relief.