You don’t want to misclassify your workers as independent contractors when they are employees for federal employment tax purposes.

If you do this bad deed, the IRS can make you pay back payroll taxes plus penalties—in some cases, these can be equal to 40 percent of gross payroll or more. That’s the bad news.

The good news is, hiring firms have a “get out of jail free” card: the Section 530 safe harbor.

Relief

If your company qualifies for Section 530 relief, the IRS can’t impose assessments or penalties for worker misclassification, and you may continue to treat the class of workers involved as independent contractors for employment tax purposes.

Amazingly, this is so even if the workers should have been classified as employees under the regular IRS common law test.

The Section 530 safe harbor was intended to help hiring firms that often have a difficult time determining how to classify their workers under the IRS “right of control” test. Section 530 was originally intended as an interim relief measure, but was extended indefinitely by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).1 Although Section 530 was never incorporated into the Internal Revenue Code, it is current law.

Section 530 relief is not available for technical services or consulting firms that operate as brokers who provide third-party clients with engineers, designers, drafters, computer programmers, systems analysts, or similar workers.2

Step One in Any Worker Audit

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