Establish Independent Contractor Status Using These Tests

Issue: Your company began hiring its sales staff as independent contractors after you became aware that a number of other companies in your industry had been hiring salespersons as qualified independent contractors for several years. The IRS now challenges you on your sales staff’s employment classification. How can you show the IRS that your salespeople are, in fact, independent contractors?

Answer: An employee who might otherwise be classified as an employee can qualify as an independent contractor under a safe harbor rule contained in Section 530 of the Revenue Act of 1978.

Your business may qualify for an IRS Section 530 “safe harbor” exception to employee status if you can prove ALL THREE of the following:

1. Consistent treatment: Since December 31, 1977, your company and its predecessors consistently treated individuals doing similar work as independent contractors and have never treated a current “independent contractor” as an employee; and
2. 1099s filed: Since December 31, 1978, your company has filed all the required federal tax returns (Form 1099-Misc.) for independent contractors; and
3. Reasonable basis: There existed a reasonable basis for treating the workers as independent contractors. Reasonable basis may be proven in several ways. Following are some common examples of showing reasonable basis:

• Your company relied on similar judicial precedent, a published ruling, technical advice to the company, or a letter ruling to the company, or

• In a past IRS audit, your company was not charged taxes or penalties for treating workers doing similar work as independent contractors, or

• It is a recognized practice in your company’s industry to treat certain types of workers as independent contractors. There is no fixed percentage of an industry that must be shown.

Here, the employer should show the IRS that many other companies in the industry have been hiring salespersons as independent contractors for several years, and that he relied on that longstanding practice in his industry in doing the same.

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