When Can an Employer Receive Section 530 Relief for Worker Misclassification?

 Posted on November 19, 2025 in Taxation Law

In some situations, employers may classify certain workers as independent contractors. However, they could be penalized for worker misclassification if they incorrectly treat workers as independent contractors when the workers should have been classified as employees. When questions about worker classification arise during a tax audit, an employer may have an option for relief through Section 530 of the Revenue Act of 1978.

Receiving Section 530 relief will involve some complex requirements. During a tax audit, representation from an experienced tax lawyer can help ensure that an employer can demonstrate that they qualify for relief. A skilled lawyer can provide the assistance needed to minimize the potential penalties an employer may face and address other tax-related concerns.

What Is Section 530 Relief?

When an employer is audited by the IRS to determine whether they have classified workers incorrectly, Section 530 may allow them to avoid owing employment taxes for those workers. If the employer meets certain requirements, they will not be required to pay employment taxes for any periods addressed during the audit, and they will not be required to pay taxes for future periods, as long as they continue to meet the applicable requirements.

There are three statutory requirements that apply to employers in order to qualify for Section 530 relief:

• Consistency in Reporting: All required forms must have been filed with the IRS that would be consistent with the treatment of workers as independent contractors. These include Forms 1099 filed during the taxable years being addressed in the audit.

• Substantive Consistency: An employer’s treatment of workers must have been consistent. If they treated the workers in question, or any other workers in similar positions, as employees at any time, they will not be eligible for relief.

• Reasonable Basis: The employer must have a valid reason for believing that a worker could be classified as an independent contractor.

When addressing the reasonable basis for a worker’s classification, the IRS has identified three "safe harbors" that may be used:

• Previous Tax Audits: If the employer had been audited in the past for issues related to employment taxes and the audit determined that the workers in question or a similar class of workers could be classified as independent contractors, this may serve as a basis for the continuing classification of workers as independent contractors.

• Judicial and Administrative Precedents: The employer may have based their actions on rulings in federal courts or administrative decisions made by the IRS regarding the classification of workers. The facts of a case must be similar to the employer’s situation, and the precedent must have been in place when the employer began classifying workers as independent contractors.

• Industry Practices: An employer may demonstrate that they were following long-standing practices used by a significant segment of their industry when classifying workers as independent contractors. The applicable industry may include other employers within the same geographical region that provide similar services or products and serve similar customers.

There are other potential reasonable bases for an employer’s classification of workers. They may state that they relied on the advice of an advisor such as an accountant or attorney or that their decisions were based on rulings by state courts that addressed similar issues involving state employment taxes. An employer may also argue that they were acting in good faith.

Contact Our San Jose, CA Tax Attorney

The penalties for worker misclassification can be significant, and employers will need to make sure this issue will be addressed correctly during tax audits. While Section 530 relief can help an employer demonstrate that they have classified workers correctly and are not required to pay employment taxes, meeting the requirements for this form of relief will involve a variety of complex factors.

At John D. Teter Law Offices, our San Jose tax audit lawyer can provide representation for employers in these cases, helping them provide the right information to the IRS and making sure they can demonstrate that they qualify for relief. Contact us at 408-866-1810 to arrange a consultation and learn more about how we can assist with tax audits and mitigate potential tax penalties.