Misclassifying an employee as an independent contractor may have many negative impacts on a business, such as fines, penalties, and civil liabilities. Although misclassifying a worker can lead to serious consequences, there are voluntary relief programs that can be used to lower your business risk. This article addresses three types of relief programs: Section 530 Safe Harbor,  Voluntary Classification Settlement Program, and Classification Settlement Program.

Seeking relief under Section 530 Safe Harbor

Section 530 of the Revenue Act of 1978 provides employers with relief from federal employment tax obligations if certain statutory requirements are met.

To qualify for the safe harbor, a company must satisfy three requirements:

1. reporting consistency,
2. substantive consistency, and
3. reasonable basis.

For reporting to be consistent, the company must have timely filed all federal tax returns consistent with the independent contractor classification, such as by using Form 1099-MISC. For a substance to be consistent, the company must have treated the workers, and any other individuals who were similarly situated, as independent contractors. For a reasonable basis, the company must show that it reasonably relied on a related court case or IRS ruling, a prior IRS audit, the practice is a significant segment of the industry, or some other reasonable basis, such as the advice of an attorney or accountant.

Seeking relief through the Classification Settlement Program (CSP)

The IRS Classification Settlement Program (CSP) allows the IRS and the company to resolve workers’ classification issues administratively by settling a tax debt owed due to misclassifying employees as independent contractors. Combined with the above Section 530 Safe Harbor Relief under Section 530, the CSP can be used to resolve payroll tax disputes.

Participating in the Voluntary Classification Settlement Program (VCSP)

The VCSP allows companies to reclassify independent contractors and other workers as employees prospectively with partial relief from federal employment tax liability. It is a voluntary program used for future tax periods with partial relief.

To be eligible for the VCSP, a company must have consistently treated the workers to be reclassified as independent contractors or other nonemployees (eg. Filing 1099 Forms), no current audits by the  IRS, DOL, or other state government, compliance with any prior audit, no current contesting of classification in court, and an agreement to treat the class of workers as employees for future tax periods in exchange for relief from certain employment tax liability, penalties, and interest.

For more information on best practices for engaging independent contractors or finding out more on how to utilize the relief programs, contact us for a complimentary consultation.