ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY ALL ABOUT IRS SAFE HARBOR RULES – PART 1

By Robert S. Schriebman

2025

INTRODUCTION

This is Part 1 of a three-part series discussing the ins and outs of IRS “Safe Harbor” rules also known as Section 530. Before going into specifics, it must be understood that these rules relate only to IRS audits. There is no similar Safe Harbor legislation for EDD audits. In EDD worker status audits it is common to have an inconsistency wherein the employer is properly treating workers as independent contractors for IRS purposes but not for the EDD. In other words, the EDD will find the worker to be a common law employee requiring a W2 instead of a 1099.

There are new rules modifying Section 530 that are now found in IRS Rev. Proc. 2025-10. The old rules set forth in Rev. Proc. 85-18 are now obsolete.

You’ll not find Section 530 in the Internal Revenue code. It was enacted by the Revenue Act of 1978, (Pub. L. No. 95-600, 92 Stat. 2763). Originally enacted as a temporary measure, it was extended indefinitely by the Tax Equity and Fiscal Responsibility Act of 1982.

WHAT DOES SECTION 530 SAY?

Section 530 provides that an employer will not be liable for Federal employment taxes, with respect to an individual or class of workers if certain statutory requirements are met. Under Section 530, the employer, not the worker, is eligible for relief from the employment tax liability that would otherwise apply in the Internal Revenue Code.

Section 530 (a) generally provides that if the employer did not treat a worker as an employee for any period, then the worker will be deemed not to be an employee for that period, unless the employer had no reasonable basis for not treating the worker as an employee. As a requirement for this relief, the employer is required to file all federal tax returns (including information returns) required to be filed by the employer with respect to the worker for the period and are filed on a basis consistent with the employer’s treatment of the worker as not being an employee, and, the employee has not treated any other worker holding a substantially similar position as an employee for purposes of employment taxes. Section 530 prevents the IRS from reclassifying certain workers as employees whom the taxpayer has treated as independent contractors.

THE ELEMENTS OF SECTION 530 RELIEF

There are many elements that must be satisfied before the Safe Harbor rules apply. Lets look at them:

• The employer must treat the worker as an independent contractor. The employer is also required to file all required federal tax returns including information returns. This means the employer must file quarterly and annual payroll tax returns such as Forms 941 and 940. The employer must also issue all required information returns such as W2, W3, 1096, and 1099.
• The employer must be consistent in the treatment of the worker. The employer must not treat designated employees the same way the contractor is treated. In other words, the employer cannot have employees doing substantially the same jobs as the contractor.
• The employer must have a reasonable basis for not treating the worker as an employee. Here are some examples of the reasonable basis requirements.
  1. A judicial decision or published rulings and technical advice from the IRS. If the employer has a private letter ruling, this will suffice.
  2. A past IRS audit of the taxpayer in which there was no assessment attributable to the treatment of other designated employees holding substantially similar positions.
     

     There has been substantial changes to this rule which will be discussed in Part 2.

  3. Long-standing recognized practice of a significant segment of the industry in which that worker was engaged, or
  4. If the employer had some other reasonable basis for not treating the worker as an employee.

WHO IS AN EMPLOYEE?

For purposes of Section 530, the term “employee” includes:

• An officer of a corporation.
• A common law employee.
• Agent-drivers, commission-drivers, full-time life insurance salespersons, home workers or traveling or city salespersons.
• Individuals who work for a State government (or political sub-division), or federal government.

Under Section 530 there are specific examples of an individual being treated as an employee for IRS purposes. Here are a few examples:

• Withholding income tax or FICA taxes from the individual’s paycheck.
• The filing of an original or amended employment tax return, Form 941.
• The filing or Form W2 with respect to the contractor or the furnishing of a W2 to that individual regardless of whether or not tax was withheld.

CONCLUSION

For further information, please review Rev. Proc. 2025-10 as well as Rev. Proc. 85-18.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners a6502nd the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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