Under a safe haven rule, some employers can minimize uncertainty when it comes to the proper treatment of workers as employees or independent contractors for purposes of employment taxes. If the business satisfies the rule’s provisions, the characterization of an individual as an independent contractor will not be challenged.
This rule states that an individual who has consistently not been treated as a common-law employee for any period after 1977 will be reclassified as an independent contractor if the employer has both historically filed all required federal tax returns, including information returns (Forms 1099-MISC), as well as had a reasonable basis for not treating the individual as an employee.
There are three factors to consider in determining a “reasonable basis”:
- Judicial precedent, published rulings, technical advice or an IRS letter ruling
- A past audit of the business by the IRS in which there was no assessment for its classification of workers that acted in a capacity substantially similar to the position held by the worker in question
- Long-standing recognized practice by a significant segment of the industry in which the individual works, of treating such workers as independent contractors by employers
Legislation in this area has clarified and added to the requirements for qualifying for the safe haven, specifically with regard to reliance on past audits, determination of a “significant segment”, definition of long-standing industry practices and circumstances under which the burden of proof shifts to the IRS.