Note: § 530 is NOT codified as a part of USC Title 26 ( Internal Revenue Code) and is the section referenced in the Act
Under § 530(a) “employers” can treat persons as NOT an employee:
- UNLESS there is not a reasonable basis to do so,
- all federal returns are filed on a consistent basis, and
- taxpayer (and predecessor) has NOT treated any person holding a substantially similar situation as an employee after 12/31/77
If the taxpayer establishes a prima facie case for independent contractor status the burden shifts to IRS, BUT the taxpayer must fully cooperate with reasonable IRS information requests. The shift in the burden of proof does not apply for purposes of determining whether the taxpayer had any other reasonable basis for treating the worker as an independent contractor, but does apply to all other aspects of § 530.
If a taxpayer prospectively changes its treatment of workers from independent contractors to employees for employment tax purposes, such a change will not affect the applicability of § 530 with respect to such workers for prior periods.
“Reasonable basis” is defined in § 530(a)(2) as reliance based on:
- judicial precedent;
- published rulings;
- technical advice;
- past IRS audit; or
- long-standing recognized practice of a significant segment of the industry in which the individual is engaged.
- 25% of an industry (determined without taking taxpayer into account);
- need not have continued for more than 10 years to be considered long-standing; and
- will not fail to be treated as long-standing merely because such practice began after 1978; thus, new industries can take advantage of § 530
§ 530 does NOT apply to technical service workers, e.g.:
- computer programmer;
- systems analyst; or
- similarly skilled worker in similar line of work.
The 1986 Conference report makes clear such persons forming personal service corporations will not prevent them from being employees.
The section itself follows.
SEC. 530. CONTROVERSIES INVOLVING WHETHER INDIVIDUALS ARE EMPLOYEES FOR PURPOSES OF THE EMPLOYMENT TAXES.
(a) Termination of Certain Employment Tax Liability for Periods Before 1980.–,
(1) In general–If–,
(A) for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period ending before January 1, 1980, and
(B) in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee, then, for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.
(2) Statutory standards providing one method of satisfying the requirements of paragraph (1).–For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer’s treatment of such individual for such period was in reasonable reliance on any of the following:
(A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer;
(B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or
(C) long-standing recognized practice of a significant segment of the industry in which such individual was engaged.
(3) Consistency required in the case of 1979 tax treatment.–, Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for any period ending after December 31, 1978, and before January 1, 1980, if the taxpayer (or a predecessor) has treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 1977.
(4) Refund or credit of overpayment.–If refund or credit of any overpayment of an employment tax resulting from the application of paragraph (1) is not barred on the date of the enactment of this Act by any law or rule of law, the period for filing a claim for refund or credit of such overpayment (to the extent attributable to the application of paragraph (1) shall not expire before the date 1 year after the date of the enactment of this Act.
(b) Prohibition Against Regulations and Rulings on Employment Status.–No regulation or Revenue Ruling shall be published on or after the date of the enactment of this Act and before January 1, 1980 (or, if earlier, the effective date of any law hereafter enacted clarifying the employment status of individuals for purposes of the employment taxes) by the Department of the Treasury (including the Internal Revenue Service) with respect to the employment status of any individual for purposes of the employment taxes.
(c) Definitions.–For purposes of this section–,
(1) Employment Tax.–The term “employment tax” means any tax imposed by subtitle C of the Internal Revenue Code of 1954.
(2) Employment status.–The term “employment status” means the status of an individual, under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).