IRS declared independent contractors as employees: Can Section 530 help?
Are you going through an IRS audit? Though we know that is bad but what happens if the IRS declares that many of your 1099 independent contractors are W-2 employees, now what?
Safe-harbor provisions of Section 530 may help!
Section 530
To meet the Section 530 requirement to qualify for safe harbor relief, you must meet the following rules:
- Reporting Consistency: Consistent reporting of the federal tax returns timely (i.e., 1099s) to all workers you categorized correctly as contractors. For example, if you paid a worker more then $600, you must have filed form 1099 for that worker.
- Substantive Consistency: Independent contractors must have been treated as non-employees, as well as any similar workers. Example, you employ your sister-in-law who does the same exact job as your independent contractor as an employee, she must also be treated as an independent contractor.
- Reasonable Basis: You must prove that you had a rationale for treating your workers as independent contractors. Example, you relied on the advice of an accountant or business lawyer who knew the facts about your business.
Suppose you fail to qualify for Section 530 safe harbor relief. In that case, the IRS Voluntary
Classification Settlement Program (VCSP) may offer a way to settle your tax debt of back payroll taxes for that misclassification.
How the Voluntary Classification Settlement Program (VCSP) can help when you don’t qualify for Section 530
Under the VCSP, you will reclassify your independent contractors as employees for future tax periods and the IRS will forgive a big portion of your past federal employment taxes. You will only pay 10 percent of the most current year’s employment taxes and best of all no interest or penalties!
To qualify you must:
- Currently treat your employees to be as independent contractors and not employees
- Have treated your employees to be and workers that do similar work as non-employees
- Have filed all 1099s for your employees to be for three years prior to filing Form 8952.
It’s essential to meet these requirements because once you do then the VCSP helps you qualify for Section 530 safe harbor relief. Section 530 is better for you then VCSP because it protects you if you misclassified those workers, you could still treat them as independent contractors for federal employment tax purposes even if the IRS deems them to be employees. This means you don’t have to pay any employment taxes back, under VCSP you must pay 10 percent of one year’s worth. Section 530 will save you thousands of employment taxes that you would have paid under the VCSP, and you won’t have to reclassify your independent contractors as employees.
The qualifications of VCSP also state that you cannot be:
- In an IRS dispute over employee status of your future employees
- Under an IRS employment tax audit.
- Under a Department of Labor or State agency classification exam for employees to be.
- Previously examined by any of these government agencies about the classification of your employees to be.
To apply for VCSP you must apply using Form 8952, this can be filed at any time, but it is best to do this at least 60 days before treating your employees to be as employees.
Points to remember
- The IRS needs you to file 1099 forms for all your independent workers if you qualify for the VCSP.
- You will only pay 10 percent of the most current year’s employment taxes and best of all no interest or penalties
- VCSP agreements bind you for future taxes
- VCSP agreements reduce assessed employment taxes, especially if you misattribute employees over several years.
- In the case of misclassification where section 530 doesn’t apply, VCSP may still help you qualify for section 530
