Academic journal article Journal of Accountancy

How Employers of Independent Contractors Spell Relief

Academic journal article Journal of Accountancy

How Employers of Independent Contractors Spell Relief

Article excerpt


Employment taxes is one of the areas to which the Internal Revenue Service has turned its attention (and its resources). In 1989, the IRS expressed concern that the misclassification of workers was resulting in the loss of significant amounts of revenue. The IRS has again begun to examine carefully whether certain workers have been properly classified as independent contractors or whether they should be treated instead as employees (with, of course, the resulting increase in reported income and payment of employment and income taxes).


As previous discussion noted, the key element in a worker's status is whether sufficient control is present to establish an employer--employee relationship (see JofA, June89, page 12). To establish this, the IRS has developed a set of factors, based on the common law test of control, to consider in this determination.

Section 530 relief. As might be expected, there have been controversies between taxpayers and the IRS over whether "sufficient control" is present. To resolve some of these, Congress, as part of the Revenue Act of 1978, enacted section 530. Under this provision, a taxpayer is not liable for employment taxes if he (or it) can demonstrate a reasonable basis for treating workers as independent contractors. In addition, section 530 established three types of statutory reasonable basis standards; if any of these is met, the business will not be liable for employment taxes.


Judicial or administrative precedent. A business has met this standard if it reasonably relied on a judicial precedent, published ruling or technical advice or ruling (letter ruling or determination letter, for example) issued to it. The judicial precedent or published ruling does not have to relate necessarily to the particular industry or business.

Past IRS audit. If there was a prior examination in which there was no assessment of taxes, attributable to the treatment of workers in the same (or substantially similar) positions as the workers currently in question, a reasonable basis exists. …

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