(1) Section 530 is a relief provision that should be considered as the first step in any case involving worker classification. Relief is available to businesses that are under examination or involved in administrative (including Appeals) or judicial proceedings with respect to assessments based on employment status reclassification. The legislative history states that section 530 is to be "construed liberally in favor of taxpayers."

It is not necessary for the business to claim section 530 relief for it to be applicable. In order to correctly determine tax liability, you must explore the applicability of section 530 even if the business does not raise the issue. Section 530(e)(3) provides that a worker does not have to be an employee of the business in order for relief to apply. Additionally, the business need not concede or agree to the determination that the workers are employees in order for section 530 relief to be available.

Publication 1976, Independent Contractor or Employee?, must be provided before initiating any worker classification examination.

The business must meet two consistency requirements before the relief provisions of section 530 apply. For any period after December 31, 1978, the relief applies only if:

In addition to the consistency requirements, the business must have relied on some reasonable basis, including the safe havens of a prior audit, a judicial precedent or an industry practice.

Employers seeking section 530 relief must:

The examiner should work with the business to determine what information is needed to conclude whether the business has met the requirements for section 530 relief. Exercise caution to ensure requested information is both relevant and reasonable.

If the business cooperates with the investigation, the Service will bear the burden of proving the business’s treatment of the worker is inaccurate. Section 530(e)(3)(4) does not apply in determining whether the business had a reasonable basis for not treating the worker as an employee other than those contained in the safe haven provision.

If the business is entitled to such relief, the issue of worker classification will be discontinued. These workers will continue to receive Form 1099–MISC. However, the fact that the business is entitled to section 530 relief does not imply that the workers are employees. The workers may still request a determination of their individual status by filing a Form SS–8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Comment on Form 4318–A (Continuation of Examination Workpapers) or Form 5773 (EP/EO Workpaper Summary Continuation Sheet) should explain the basis for allowing or denying the relief. In unagreed cases, address the section 530 relief issue in the examination report in the same manner as any other unagreed issue (statement of facts, law, taxpayer position, and conclusion).

It is important to remember that even if an employer is entitled to relief under section 530, the employees remain employees for other purposes of the Code. Section 530 only terminates the liability of the employer for the employment taxes but has no effect on the employee’s status. It does not convert workers from the status of employee to the status of self-employed (independent contractor). The section 530 employee is still considered an employee for income tax and qualified benefit plan eligibility purposes. Therefore, the employer must consider the section 530 employees as employees in determining whether its pension, profit-sharing, or stock-bonus plan satisfies the qualification requirements of section 401(a).

The section 530 employee remains liable for the employee share of FICA tax with respect to all wages received. The employee’s share of FICA is reported on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, by substituting the word "wages" for the word "tips." Rev. Proc. 85–18, section 3.08; section 31.3102–1(c). See also Rev. Rul. 86–111, 1986–2 C.B. 176.

Where section 530 employees have filed and paid their tax under the Self Employment Tax Contributions Act (SECA), they may file a claim for refund for the difference between SECA tax and the employee share of FICA.

As an employee, the worker generally cannot deduct unreimbursed business expenses on Schedule C, but must deduct them, if at all, as miscellaneous itemized deductions on Schedule A, Form 1040, subject to the two percent limitation of IRC § 67. This sometimes results in liability for the alternative minimum tax. Further, the worker cannot adopt or maintain a self-employment retirement plan. Finally, certain benefits provided by the business to a worker as an employee may be excludable from income by the employee due to specific IRC exclusions provided only to employees (e.g., employer provided accident and health insurance).

To determine whether the control test is satisfied in a particular case, the facts and circumstances must be examined. Questions about the relationship between the worker and the prospective employer are asked to ascertain control. Historically, this series of questions was called the twenty factor test. This is the number of objective pieces of information identified as relevant by analyzing the approaches that courts have developed in making employee status determinations.

However these are not the only factors that may be important, and in certain cases some of the traditional twenty factors may be disregarded as unimportant. Every piece of information in a case that helps the extent to which the firm does or does not retain the right to control the worker is important.

There are four very important points to remember:

The pieces of information that are important to help determine employee status change over time because business relationships change over time. What might have been a crucial piece of evidence in 1985 on which to base a decision about whether a business retained the right to control a worker may not carry the same weight for making an employee status determination currently.

For example, the fact that a delivery driver was required to wear a uniform bearing the name of the retail business demonstrated control indicative of an employee relationship. Today, these requirements may be established to provide customers with some assurance that the worker can be safely allowed entry to the home or business. In other words, the wearing of the uniform today may have less to do with the degree of control exercised by the business over the worker than it had in the past.

For FICA, FUTA and income tax withholding, the term "employee" includes any individual who, under the usual common law rules for determining the employer/employee relationship, has the status of an employee. Therefore, with certain exceptions, the imposition of employment taxes always involves the employer/employee relationship issue and requires the application of the common law rules to the specific facts and circumstances of each employer. This application is the basis for determining the employment status of an individual worker or a group of workers.

Under common law, a worker is an employee when the person for whom the services are performed has the right to control and direct the individual who performs the services. This control reaches not only the result to be accomplished, but also the details and means by which that result is to be accomplished. In other words, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. It is not necessary that the employer actually direct, or control the manner in which the services are performed; it is sufficient if the employer has the right to do so. Exhibit 4.23.5–1 contains types of evidence that will help to determine control in the common law employer-employee relationship.

In a case requiring an employer-employee relationship determination, the examiner will compile information bearing on the factors explained in Exhibit 4.23.5–1. Evaluating such evidence will generally enable the examiner to resolve the employer-employee relationship question by applying law, regulations, or a clearly applicable ruling.

For treatment of special types of employment and special types of wage payments, refer to Publication 15, Employer's Tax Guide (Circular E) for quick research on an issue. The Code, regulations, revenue rulings, court decisions and any other pertinent research are the best authority for any issues being proposed. Also refer to Exhibit 4.23.5–2 for a quick reference regarding the tax treatment by the employer of FICA, FUTA, and income tax withholding of wages earned by the various types of workers.

If the relationship of employer-employee exists, the designation or description of the parties as anything other than that of employer-employee is immaterial. Contractual designation of a worker as an independent contractor cannot outweigh evidence regarding the actual relationship between worker and business. Questions arising in employer-employee relationships which cannot be resolved by the examiner should be referred to the Headquarters Office for technical advice in accordance with IRM 4.23.15, Technical Advice From the Headquarters Office.

Corporate officers are specifically included within the definition of an employee under FICA, FUTA, and for federal income tax withholding purposes. See IRC sections 3121(d)(1), 3306(i), and 3401(c). The common law standard is not applicable. The regulations provide that generally an officer of a corporation is an employee of the corporation. However, an officer is not considered to be an employee of the corporation if two requirements are met:

The officer must meet both requirements to be excepted from employee status. In determining whether services performed by a corporate officer are considered minor or nominal, examine the character of the service, the frequency and duration of performance, and the actual or potential importance or necessity of the services in relation to the conduct of the corporation’s business. Rev. Rul. 74–390, 1974–2 C.B. 331.

A director of a corporation, acting in the capacity of a director, is not an employee of the corporation for those services, even if that worker also serves as an employee or officer of the corporation for other services. Therefore, part of the compensation paid to this worker can be for services rendered as an independent contractor (director) and part of the payments can be for services rendered as an employee. Rev. Rul. 58–505, 1958–2 C.B. 728.

When it is determined that a corporate officer is an employee, examine all payments to the officer, such as amounts labeled as draws, loans, dividends, or other distributions, to determine whether the payments are in fact wages for FICA, FUTA, and income tax withholding purposes. Rev. Rul. 74–44, 1974–1 C.B. 287.

If a worker is not an employee under the usual common law rules or a corporate officer, the worker and the business may nevertheless still be subject to employment taxes. IRC § 3121(d)(3) lists individuals in four occupational groups who, under certain circumstances, are considered employees for FICA tax, and, in some instances employees for FUTA tax, but not for income tax withholding. These workers are referred to as statutory employees. They are:

Workers in these four occupational groups are employees for FICA tax purposes, even if they do not meet the common law test but meet the general and specific requirements for each occupational group.

To qualify as a statutory employee, a worker must first meet general requirements prescribed specifically for the category under which the worker is qualifying (26 CFR 31.3121(d)–1). Exhibit 4.23.5–3 contains the requirements that determine statutory employees under FICA.

By definition, a worker cannot be a statutory employee under IRC 3121(d)(3) if that worker is a common law employee. This conclusion is supported by the legislative history of IRC 3121(d). See S.Rep. No. 1669, 81st Cong., 2d Sess. 144 (1950), 1950–2 C.B. 346, 347 and Lickiss v Commissioner, T.C. Memo 1994–103.

Statutory employees are not employees for the purpose of deducting trade or business expenses. Therefore, they may deduct their expenses on Schedule C rather than as miscellaneous itemized deductions. They receive a Form W–2. A check is made in Box 13 in the Statutory Employee Box to indicate that the worker is a statutory employee. Income tax withholding is not withheld from statutory employees. See Rev. Rul. 90–93, 1990–2 C.B. 33.

If statutory employees also have earnings from self-employment, they may not use expenses from services as a statutory employee to reduce net earnings from self-employment for SECA proposes. This is because services as a statutory employee do not constitute the carrying on of a trade or business for purposes of SECA. Statutory employees are required to file a Schedule C for services performed as a statutory employee which is separate from the Schedule C that reports net earnings from self-employment.

Workers in three occupations will not be treated as employees for FICA, FUTA, or federal income tax withholding proposes provided they meet certain qualifications. These workers are referred to as "statutory non-employees."

IRC § 3508(b)(1) provides that an individual is a qualified real estate agent if the following requirements are met:

Proposed Treas. Reg. section 31.3508–1(b)(2) defines services performed as a real estate agent and provides examples. Services performed as a real estate agent do not include management of property.

IRC § 3508(b)(2) provides that a worker is a direct seller if the following qualifications are met:

The Small Business Job Protection Act of 1996 added qualifying newspaper distributors and carriers as direct sellers. Under the amendment, a person engaged in the trade or business of the delivery or distribution of newspapers or shopping news qualifies as a direct seller provided all remuneration is directly related to sales or output, rather than hours worked. Also, the services must be performed pursuant to a written contract that provides the person will not be treated as an employee for federal tax purposes. The provision is effective with respect to services performed after December 31, 1995.

IRC § 3506 provides that a companion sitter will not be an employee of a companion sitting placement service if the companion sitting placement service neither pays nor receives the salary or wages of the sitter. The placement service may be compensated on a fee basis by either the sitter or the individual for whom the sitting is performed. The companion sitter is deemed to be self-employed unless considered to be a statutory or common law employee of the individual for whom the services are performed.

State and local government employees were excluded from social security coverage from 1935 (the date of the original Social Security Act) until 1950 because there was a legal question regarding the federal government's authority to tax state and local governments. Beginning in 1951, states were allowed to enter into voluntary agreements with the federal government to provide social security coverage to public employees. These agreements are called Section 218 Agreements because they are authorized by Section 218 of the Social Security Act.