The IRS has issued new guidance on Section 530 relief, an important protection for businesses that treat workers as independent contractors.
Rev. Proc. 2025-10 replaces older IRS procedures and gives more detail on when a business may avoid federal employment tax liability if the IRS later challenges its worker classifications.
For businesses that use independent contractors, this is a good time to review three things: how workers are classified, whether Forms 1099 have been filed properly, and what records support contractor treatment.
Why this matters
If a worker is treated as an independent contractor, the business generally does not withhold income tax or pay employment taxes on amounts paid to that worker. If the IRS later determines the worker should have been treated as an employee, the employer may owe back employment taxes, interest, and penalties.
Section 530 can provide relief, but only if the business meets certain requirements.
The three basic requirements
To qualify for Section 530 relief, a business generally must show:
1. Consistent reporting
The business must have filed the required tax forms, such as Forms 1099-NEC, consistent with treating the worker as a contractor. Rev. Proc. 2025-10 clarifies that this requirement is reviewed worker by worker and year by year.
2. Consistent treatment
The business must have treated workers in substantially similar positions consistently. If some workers in the same or similar roles were treated as employees while others were treated as contractors, that inconsistency can create problems.
3. Reasonable basis
The business must have had a reasonable basis for treating the worker as a contractor. This may include court authority, a ruling issued to the taxpayer, a prior qualifying IRS audit, or a long-standing practice in the taxpayer’s industry.
The new guidance gives more detail on these standards. For example, an industry practice generally must have existed for at least 10 years, and a significant segment of the industry is generally presumed where about 25% or more of similarly situated businesses in the taxpayer’s geographic area follow the same practice.
A few practical cautions
Businesses should also review whether contractors are being treated like employees in other ways. For example, providing employee-only benefits, including contractors in employee benefit plans, or treating them as employees for wage-and-hour purposes may weaken the argument for contractor status.
Section 530 also has limits. It is a federal employment tax relief provision. It does not automatically resolve worker classification issues for workers’ compensation, wage-and-hour laws, employee benefit plans, or other state law purposes.
What businesses should do now
Businesses that use independent contractors should review:
- Their current contractor classifications
- Their Form 1099 filing history
- Whether similarly situated workers have been treated consistently
- The records supporting their reasonable basis for contractor treatment
- Whether contractors have received employee-type benefits or treatment
This review is best done before an IRS examination begins, while records are still available and corrections may be easier to evaluate.
Need help evaluating your exposure?
We can review your current worker classifications, evaluate whether your records support a Section 530 position under Rev. Proc. 2025-10, and help determine whether a proactive correction option, such as the Voluntary Classification Settlement Program, may make sense.
Sincerely,
Abeles and Hoffman, P.C.
