• FREE RESOURCES
        • Accounts Payable
          Finally! The trick to securing greater T&E compliance
          Benefits
          Rooting out folks who don’t belong on your health plan: A 6-point dependent audit checklist
          IT
          3 costly misconceptions about biz email compromise
          Credit and Collections
          Collecting via email: 4 must-make moves in your subject line
          Accounts Payable
          5 Tough-to-spot signs that an invoice is fake
  • PREMIUM CONTENT
        • Staff management
          120 Proven Communications Tips for Today’s CFO
        • Payroll
          Handling Nonexempt Employee Pay: Stay Compliant and Avoid DOL Audits
          Accounts Payable
          T&E Best Practices: Complete Guide to Ensure Compliance
          Payroll
          Payroll Best Practices: 4 Ways to Save Time and Money
        • Staff management
          Email Best Practices: A 6-Question Quiz
          Staff management
          Innovative Communications Strategies: An Email Case Study
          Staff management
          A 5-part Framework for Successful Workplace Communications
        • SEE MORE
          PREMIUM RESOURCES
  • CORONAVIRUS RESOURCES
  • LOGIN
  • SIGN UP FREE

CFO Daily News

  • FREE RESOURCES
        • Accounts Payable
          Finally! The trick to securing greater T&E compliance
          Benefits
          Rooting out folks who don’t belong on your health plan: A 6-point dependent audit checklist
          IT
          3 costly misconceptions about biz email compromise
          Credit and Collections
          Collecting via email: 4 must-make moves in your subject line
          Accounts Payable
          5 Tough-to-spot signs that an invoice is fake
  • PREMIUM CONTENT
        • Staff management
          120 Proven Communications Tips for Today’s CFO
        • Payroll
          Handling Nonexempt Employee Pay: Stay Compliant and Avoid DOL Audits
          Accounts Payable
          T&E Best Practices: Complete Guide to Ensure Compliance
          Payroll
          Payroll Best Practices: 4 Ways to Save Time and Money
        • Staff management
          Email Best Practices: A 6-Question Quiz
          Staff management
          Innovative Communications Strategies: An Email Case Study
          Staff management
          A 5-part Framework for Successful Workplace Communications
        • SEE MORE
          PREMIUM RESOURCES
  • CORONAVIRUS RESOURCES
  • Accounts Payable
  • Credit and Collections
  • Payroll
  • Accounting
  • Benefits
  • Finance Technology
  • More
    • Employment Law
    • Strategy
    • Policy and Culture
    • Fraud
    • Payments and Transactions
    • Budgeting and Forecasting
    • Banking
    • Staff Management
    • Cost Control
    • Supply Chain
    • IT

Your company misclassified a worker: Do you qualify for IRS relief?

Alyssa Evans
by Alyssa Evans
November 2, 2018
  • Accounting
  • Payroll
3 minute read
  • SHARE ON

Another day, another high-profile – and high-cost – misclassification lawsuit makes the news.

It seems with the growth of the gig economy, it’s getting even trickier to classify workers with 100% confidence. And that uncertainty can lead to compliance issues and substantial fines.

So, what happens when one day, your company realizes an independent contractor (IC) you paid should actually have been an employee?

The key is to gather documentation quickly, so you can avoid some costly consequences. In the case of worker reclassification, your company may be eligible for IRS Section 530 relief from federal employment tax obligations … if you meet three specific criteria.

Review  those three statutory requirements below (and share them with A/P, Payroll and HR) to ensure you’re covered and ready:

1. Reporting Consistency

Your company must be able to show that you “timely filed” information returns consistent with its previous classification of the worker. In other words, if A/P had paid the worker as an IC, you have to prove that you filed accurate, timely 1099-MISCs for the taxable year(s) in question.

(Tell finance staffers: That’s just one more reason why filing year-end forms on time, consistently, is so vital!)

2. Substantive Consistency

To get relief, your company also must prove that it never treated the worker – or “any worker holding a substantially similar position” – as an employee.

Example 1: John was hired as an employee, then (wrongly) reclassified as an IC. The company later finds out John’s misclassified. It may not be eligible for relief since John was acknowledged as an employee in the past.

Example 2: Sally (an employee) had similar duties to Katie (an IC). During an audit, the company’s told that Katie is misclassified. IRS may say that you’re not eligible for relief because both women held “similar positions” but were classified differently.

3. Reasonable Basis

Lastly, your company must demonstrate that it relied on one of four “safe havens” for treating the worker as a non-employee:

  1. Prior audit. The audit must have been “an examination for employment tax purposes of the status of the class of workers at issue or a substantially similar class of workers.” Essentially, a previous audit must have approved of the way you classified the worker (or similar workers) in question.
  2. Judicial precedent. As support, you can use a federal precedent/ruling that examines a similar situation and supports your decision to classify a worker a certain way. (Note: IRS says state court decisions and rulings of other agencies don’t create judicial precedent.)
  3. Industry practice. Your company can also show that it relied on an established, standard practice of your industry. (IRS generally defines “industry” as “firms located in the same geographic or metropolitan area which provide the same product or service and compete for the same customers.”)
  4. Other reasonable basis. If you fail to meet the first three safe havens, you could still get relief if you can show you relied on some other reasonable basis for treating the worker as an IC instead of an employee. According to IRS, that may include 1) reliance upon advice from an accountant or attorney, 2) common law rules, or 3) prior state administrative decisions or other federal determinations.

The bottom line: If you can support your classification decisions with reasonable explanations and solid documentation, you may be able to avoid scrutiny and fines.

Alyssa Evans
Alyssa Evans
Alyssa, a member of the CFO Daily News staff, has written extensively on business and finance for several years. She has produced content for accounts payable professionals and finance executives and has developed whitepapers and infographics for the finance and accounting industry.

Keep Up To Date with the Latest Finance News

With CFO Daily News arriving in your inbox, you will never miss critical stories on accounting, benefits, payroll & employment law strategies.

Sign up for a free CFO Daily News membership and get our newsletter!
  • This field is for validation purposes and should be left unchanged.
CFO Daily News Logo
  • ABOUT CFO DAILY NEWS
  • ADVERTISE WITH US
  • WRITE FOR US
  • CONTACT
  • Accounting
  • Benefits
  • Payroll
  • Policy and Culture
  • Employment Law
  • Fraud
  • Finance Technology
  • Accounts Payable
  • Credit and Collections
  • Strategy
  • Payments and Transactions
  • Budgeting and Forecasting
  • Banking
  • Staff Management
  • Cost Control
  • Supply Chain
  • IT

CFO Daily News, part of the SuccessFuel Network, provides the latest Finance and employment law news for Finance professionals in the trenches of small-to-medium-sized businesses. Rather than simply regurgitating the day’s headlines, CFO Daily News delivers actionable insights, helping Finance execs understand what Finance trends mean to their business.

Privacy Policy Terms of Service
Copyright © 2021 SuccessFuel

WELCOME BACK!

Enter your username and password below to log in

Forget Your Username or Password?

Reset Password

Lost your password? Please enter your username or email address. You will receive a link to create a new password via email.

Log In

preloader