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The Tax Prophet Newsletter   Issue #102 MONTH, October, 2011


In This Issue:
Section 530
Safe Harbors

Independent Contractor vs. Employee -- The Basics

Part 2 of 3

Section 530

Congress directed IRS not to reclassify workers as employees when a company demonstrates a good faith believe that its workers were independent contractors.

These rules, referred to Section 530, were not incorporated into the Internal Revenue Code, but, nevertheless, remain part of the law and are critical in protecting companies against a reclassification.

Section 530 is available to companies that treated workers as independent contractors, if -

    1. The company always treated the particular worker as an independent contractor and the general class of workers performing similar work as independent contractors;

    2. After 1978, the company filed all returns (including information returns) required for the worker and all such returns were consistent with independent contractor status; and

    3. The company had a "reasonable basis" for treating the worker as an independent contractor.

Safe Harbors

In general, there are three safe harbors under Section 530:

    1. A judicial precedent, published rulings or technical advice or letter ruling to the employer;

    2. A prior IRS audit in which no assessment was made on account of improper treatment of the worker; or

    3. A long-standing recognized practice of a significant segment of the industry in which the individual worked.

These safe havens are not exclusive; a taxpayer may demonstrate a reasonable basis in some other manner. Congress directed that the reasonable basis standard should be "construed liberally in favor of the taxpayer."

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All contents copyright 2011 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.