ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY ALL ABOUT IRS SAFE HARBOR RULES – PART 2

By Robert S. Schriebman

2025

INTRODUCTION

This is part two 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  Originally enacted as a temporary measure, it was extended indefinitely by the Tax Equity and Fiscal Responsibility Act of 1982.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.  Let’s 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.

In this part two, I will review the consistency requirement under Section 530 (See element 2 above).

THE CONSISTENCY REQUIREMENT

To obtain Section 530 relief, the employer must satisfy the reporting consistency requirements set forth in Section 530(a).  The goal of the reporting consistency requirement is to ensure that the employer acted in good faith in treating an independent contractor as a non-employee. Reporting consistency requires the employer to file all required federal tax returns as well as information returns on a basis consistent with the good faith treatment of the contractor as a non-employee.

By way of example, if the employer’s position is that the worker was an independent contractor, the employer must have filed all required 1096 and 1099 forms consistent with the worker being an independent contractor for the specific periods involved.  If an employer did not file a 1099 in year 1, but filed a 1099 in year 2, the employer is not entitled to Section 530 relief in year 1, but may be entitled to that relief in year 2.

If the employer filed 1099s for some individuals but did not file 1099s for other individuals, the employer satisfies the reporting consistency requirement only for the contractors for whom the employer filed 1099s.  For example, if the employer filed 1099s for individual workers A, B, and C in year 1, but did not file 1099s for workers D, E, and F in year 1, the employer is not entitled to Section 530 relief for workers D, E, and F in year 1.  The employer may be entitled to Section 530 relief for contractors A, B, and C in year 1 if the employer otherwise meets the requirements for Section 530 relief for that year.  If the employer files 1099s for all the contractors in year 2, the employer may be entitled to Section 530 relief for those workers in year 2 if the employer meets the requirements for Section 530 relief for year 2.

The employer will not fail the reporting consistency requirement if the employer, in good faith, mistakenly files the wrong type of information return or, as long as the return demonstrates a good faith attempt to accurately report the amount paid or reports an inaccurate amount paid.  Not all workers are required to have proper 1099s.  For example, if the employer paid the individual less than the threshold amount required to file a 1099 or the worker does business as a corporation or LLC for most purposes.  For example, law corporations are not exempt from receiving a 1099.

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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