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Do safe harbor provisions for an IRS payroll audit apply to you?

If the IRS determines that your contractors qualify as employees, your business could face fines and legal penalties. One way to avoid these penalties is qualifying for Section 530 relief, a "safe harbor" provision for employers of contractors.

This "safe harbor" is a gray area that protects businesses who try to comply with employment law in good faith and meet specific requirements and conditions. If they can claim that they made a genuine attempt to hire and classify workers as contractors or employees accordingly, they could avoid penalties if the IRS audits them.

What is Section 530?

Section 530 of the Revenue Act of 1978 was intended to be temporary but is still in place today. If businesses meet the requirements of Section 530, your workers can still be classified as independent contractors by the IRS. If this happens, then you may not have to pay retroactive employment taxes and other penalties for those workers in question.

What are the requirements?

These requirements for 530 relief include the following:

  • Reporting Consistency: All required federal returns were filed in a timely manner consistent with a typical contract worker.
  • Substantive Consistency: You filed similar workers as contractors, not employees.
  • Reasonable Basis: You are filing the worker as a contractor based on one of the following: a prior audit classification, previous ruling or legal advice, well-known industry custom, or any other reasonable basis.

Section 530 protects you from retroactive employment taxes and protects contractors’ employment status. In order to maintain these protections, always keep your contractors and employees’ roles clearly defined and distinct. Contractors should file 1099s while employees should file W2s, etc. If you make a genuine effort to comply with the law, you should be able to fall under the protections of Section 530.

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