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Tackle the complex issues involved in employer/employee payroll tax matters.This course clears up the often confusing and complex issues involving employee vs. independent contractor. It also will enlighten you on the various actions an employer and its CPA can undertake to minimize the risk of misclassification. Resolve payroll tax-related issues involving the variety of employee benefit plans. Master the often confusing rules for Form 1099 reporting - when, what form and how much to report.
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Chapter 4 Section 530 Relief
Learning Objectives
After completing this chapter, you should be able to
Introduction
In this chapter we explore an option companies have if they have misclassified workers as
independent contractors. During the early 1970s more and more companies were struggling with
worker classification - were their workers employees or independent contractors? The IRS had
few regulations regarding this issue and employers were relying on revenue rules and court
cases. During those years, the IRS and the Social Security Administration compiled a list of 20
factors they saw being used in court decisions concerning worker classification. The 20 factor
test was first produced in 1987 in Rev. Rul. 87-41. The 20 factor test is an analytical tool - not
the legal test - used to help determine worker classification. The legal test is whether there a
right to direct and control the means and details of the work.
Historically the following laws were approved:
When Section 530 was introduced in 1978, Congress barred the IRS from issuing any regulations or revenue rulings concerning worker classification; however, they are allowed to issue private letter rulings, technical advice memorandums or guidance dealing with Section 530. This decision resulted in the IRS not being able to issue new revenue rulings or modify existing revenue rulings even as new developments occurred. During the same time, courts were able to modify their applications of the common law standard based on factual developments. The way the courts look at the issue now have possibly made IRS revenue rulings outdated and in potential conflict with the court system decisions.
Since the adoption of The Small Business Job Protection Act of 1996, IRS auditors are instructed to consider Section 530 as one of the first steps in any worker classification case. IRS requires its agents to consider the applicability of Section 530 even if the company does not request relief under the Section. Section 530(e)(3) specifies a worker does not have to be an employee of the company in order for relief to apply. Additionally, the company does not have to concede or agree to the determination that the workers are employees in order for Section 530 relief to be available.
The auditor hands Publication 1976 (see the Appendix at the end of the chapter) to each company at the beginning of the audit. The Publication outlines how to correctly treat certain workers as independent contractors. If the company meets the three relief requirements, the company will not owe employment taxes for these workers who have been treated as independent contractors. If the relief requirements are not met, the IRS determines if the workers are independent contractors or employees and whether the company owes employment taxes for those workers.Relief through Section 530 is available to the company during the entire examination or administrative (including appeals) process, as well as any subsequent judicial proceeding. The company does not have to claim Section 530 relief for it to be applicable.
Relief Requirements
A company must meet all three of the following to receive relief under Section 530:
Judicial Precedent Safe Haven
This safe haven allows a company to rely on the following:
If case law is used, the company must show the facts in the case relied upon are similar to their company. The facts do not need to be exactly the same and it does not even have to deal with the same industry. But, the judicial precedent must have been in existence at the time the company began relying upon it in an effort to classify their employees or a group of employees as independent contractors. Only one case needs to be presented to create the safe haven. If case law can be found to support the other side of the independent contractor versus employee issue, the one being used by the company sets the safe haven.
Aside from case law, a company may rely on a technical advice memorandum, a private letter ruling or a determination letter issued to them covering the issue of independent contractor versus employee. If the facts are materially misstated or omitted when the private letter ruling or determination letter was issued, it cannot be relied upon. And, if the facts have substantially changed since the ruling or determination was obtained, the ruling cannot be relied upon to set precedent.
If a private letter ruling was issued to a member of a group of related corporations, the company can only rely upon the ruling if it is specifically addressed to the business entity since every company in a related group is considered a separate business entity. Additionally, a private letter issued to one company cannot be relied upon by its successor. However, if there has only been a change in form, the company may use the "other reasonable basis" to rely upon discussed later in this Section.
Companies cannot rely upon state court decisions for a judicial precedent safe haven since Section 530 only deals with relief from federal employment taxes. Only federal court decisions and revenue rulings concerning the Internal Revenue Code are allowable.
Additionally, rulings by state administrative agencies, including regulators of employment, or rulings by federal agencies other than the IRS can not be used to support a judicial precedent safe haven. However, as you will see when we talk about the other reasonable basis test, state court decisions or state and federal agency rulings may be used as the basis for findings a company can reasonably rely on.
Past Audit Safe Haven
This is the easiest safe haven to present and prove, however it requires companies to potentially
hold their audit records longer than their retention record may require. Relying upon a past audit
is a reasonable basis for continuing a practice. Depending on when the audit was performed,
there are different reliances:
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