January is reporting season, and the IRS issued updated guidance reminding employers that correct and consistent reporting helps prevent reclassification of a non-employee to an employee.
If audited, today’s actions, and those you made prior to hiring an independent contractor (or other nonemployee), influence tomorrow’s decisions, as Rev. Proc. 2025-10 (Rev. Proc. 2025-10) points out.
Rev. Proc. 2025-10 updates guidance on Section 530 of the Revenue Act of 1978 and supersedes Rev. Proc. 85-18.
NOTE: It is not part of the Internal Revenue Code; yet Rev. Proc. 2025-10 is the cornerstone of your ability to have “relief” from the employment tax collection and reporting, which is required for employees.
Section 530 relief provides an employer with justification for having a contactor instead of an employee, and it hinges on three requirements: reasonable basis, substantive consistency and reporting consistency.
Having a reasonable basis for hiring a contractor means an employer used judicial precedent or published rulings, past IRS audits with no employment tax assessments or long-standing industry practices to justify using a contractor instead of an employee. Industry practice is generally considered significant if 25% of the industry follows it, and a practice is long-standing if it has existed for 10 years.
Substantive consistency means that either current or past employers have treated any individual in a similar position as an employee beginning Jan. 1, 1978. Audit consideration is given to the relationship between the employer and the individual, as well as job functions, duties, responsibilities and control when looking at this element.
Reporting consistency means an employer consistently reported compensation of employees and nonemployees on the proper forms. Employers use Form 941, Employer’s Quarterly Federal Tax Return (and variations), and Form W-2, Wage and Tax Statement, for employees, while Form 1099-NEC, Nonemployee Compensation, is used for nonemployees like contractors.
Contractors would not have withholdings for FICA or be included in the annual Form 940, Employer’s Annual Federal Unemployment Tax Return. By using the proper form, the reporting consistency requirement is met, and Section 530 relief could apply if needed.
Section 3.07 and 3.08 of the documents has details on nuances of the reporting of certain types of nonemployees or dual-status individuals.
An employer’s actions – using reasonable basis and substantive consistency for a contractor and reporting consistency for both employees and contractors – provides further protection from worker reclassification in an audit by qualifying for Section 530 relief.
Nuances included in the updated Rev Proc. include a definition of an employee, which includes corporate officers, individuals with common law employee status, statutory employees and certain government officials [§3121(d)(1), §3121(d)(2), §3401(c), §3121(d)(4) & §3121(d)(3)].
If a taxpayer qualifies for Section 530 relief, the IRS will abate assessed liabilities and refund payments related to worker reclassification issues.
