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September 30, 2010

Worker Classification III: Stay out of 'hot water' with safe harbor rules

This post is for business owner/managers and their lenders.

Section 530 of the Internal Revenue Code (I know you love it when I talk in code!) provides relief from what at one point was thought to be the overzealous application of worker classification criteria by the IRS.

Nah, the IRS? Overzealous???


What keeps the business safe?

The Section 530 safe harbor provides that an individual who has not been treated as an employee will not be reclassified by the IRS as an employee if:

  • The taxpayer had a reasonable basis for the treatment based on
    • Judicial precedent and IRS rulings
    • A past examination where there was no assessment related to similar positions being treated as employees
    • A long-standing recognized practice of a significant segment of the industry in which the individual was engaged
  • No other workers in a similar position were treated as an employee for payroll tax purposes
  • The taxpayer filed all required paperwork (like 1099s) consistent with the worker not being an employee

If you are a business owner/manager:

  • Check the status of the people who perform work for your company
  • Consider checking in with your CPA as to whether the status is accurate
  • Double-check that you file all appropriate documents and have written agreements with those who provide services to your company

If you are a business lender:

  • Do the same
  • Document any conversations you have with the owner/manager regarding this issue

If the business does get bit by the IRS for back taxes, at least you (and loan committee and the regulators) will know you made a reasonable effort to check.

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Linda Keith, CPA


Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.

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