The Internal Revenue Service (IRS) issued Revenue Procedure 2025-10 modifying and superseding its Revenue Ruling and guidance previously issued regarding the application of Section 530 of the Revenue Act of 1978. Section 530 relieves employers from paying federal employment taxes arising from employment status (classification/misclassification) disputes with the IRS that result in large employment tax assessments from the IRS’s proposed reclassifications of workers from independent contractor to employee status. Specifically, this Revenue Procedure clarifies the provisions of Revenue Procedure 85-18 with respect to the definition of employee, the Section 530 requirement for the filing of required returns, and the reasonable basis component of the Section 530 safe harbor rules. It also updates the guidelines set forth in section 3.03 of Rev. Proc. 85-18 (interpreting the word “treat” for purposes of determining whether a taxpayer did not treat an individual as an employee for purposes of Section 530). The IRS says this Revenue Procedure includes new provisions that reflect statutory changes made to section 530 since 1986.
Among other things, Revenue Procedure 2025-10 discusses facts that may preclude a good faith assertion under Section 530 that a worker was in good faith deemed a non-employee, including: (1) claiming income tax deductions, or treating payments made to or on behalf of the workers as excludable from income, under provisions of the tax code applicable only to employees; (2) claiming employer credits, such as credits for paid sick and/or family leave under laws like the Families First Coronavirus Response Act, the Employee Retention Credit, or any other credits specified in future guidance that are calculated with respect to wages or compensation paid to an employee; (3) failing to comply with federal or state labor law including minimum wage and overtime pay rules with respect to the individual that are applicable to employees or treated workers as employees for purposes of state or non-tax federal laws; (4) treating the individual as an employee for purposes of collectively bargained agreements entered into by the taxpayer; (5) permitting participation of the individual in any qualified pension, profit sharing, or stock bonus plan; (6) permitting participation of the individual in any nonqualified deferred compensation plan if such participation is limited to employees of the taxpayer; and (7) providing state unemployment insurance or worker’s compensation insurance coverage for such individual if the requirements for obtaining such state unemployment or worker’s compensation insurance is that coverage is limited to individuals performing services for the taxpayer as common law employees under the common law rules or persons that would qualify as employees for federal employment tax purposes.
The Revenue Procedure also addresses: (1) the “reporting consistency requirement” of Section 530 that ensures the taxpayer “acted in good faith in treating the individuals as” a non-employee (explaining this requirement must be satisfied on an employee-by-employee basis and on a tax filing-period-by-filing period basis); (2) the “substantive consistency” requirement of Section 530 ensuring relief applies only to a taxpayer that has consistently treated all individuals holding substantially similar positions as non-employees to prevent a taxpayer from changing its treatment of employees to non-employees to qualify for Section 530 relief, including through reincorporation, reorganization, name change, or otherwise; (3) the “reasonable basis requirement” ensuring that the taxpayer reasonably considered the worker classification status of the individual as an employee or non-employee prior to making the classification decision and explaining that taxpayers cannot satisfy this requirement on the basis of judicial precedent issued after the tax period for which the taxpayer treated the individual as a non-employee; (4) the “long-standing recognized practice of a significant segment of the industry” test for establishing reasonable basis, explaining that a practice utilized by 25% of the taxpayers industry for at least 10 years qualifies; (5) “Dual Status Workers” who perform services for a taxpayer that are completely separate and distinct from the services giving rise to the employment relationship; and (6) the fact that Section 530 does not apply in the case of an individual who, through an arrangement between the taxpayer and another person, provides services for the other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similar technical worker.
Separately, the IRS also issued Revenue Ruling 2025-3 to clarify the application of Section 530 of the Revenue At of 1978 by illustrating the application of Section 530 to five common workplace compensation scenarios. The IRS also reminded the public that Section 530 relief does not extend to individual workers, who remain liable for their personal income taxes and the employee share of FICA taxes that may result from the reclassification of a worker.