W-2, 1099-NEC, Section 530 Safer Harbor Rules

Understanding Section 530 Safer Harbor Rules For 1099 vs W2

What is W-2 Form?

   The W-2 form is made for the employee tax filling. Every employer that participates in a trade or business who pays an employee more than $600/year for any services provided must file a w-2 form for each employee (even if related to employer).

What will I find there?

    In this form the employee will find information about the income earned from the employer, amount of taxes withheld from your paycheck, benefits provided & other information for the year.

  What is 1099-NEC Form?

    The 1099-Nec form is used to report any compensation of $600 or more per year to any non-employee, to the IRS and recipient. The compensation being reported must be for services provided in a trade or business.

What are non-employees?

     “Non-employees” include but are not limited to freelancers, independent contractors, small business, or anyone who provide their services.

Independent contractor:
– Pays more tax
– May deduct business expenses
– Pays estimated taxes quarterly
Employee on payroll:
– Employee pays less tax
– Taxes withheld from paycheck
– Can’t deduct many expenses

What if the employer files an employee as a 1099? 

When the employer treats an employee as an independent contractor , the company is shifting the cost of employment towards the employee , which not only makes the employee lose benefits but it also makes their taxes go up.

This is called independent contractor misclassification.

Section 530 Safer Harbor Rules

Section 530 is a relief provision that terminates a taxpayers employment tax liability with respect to an individual not treated as an employee. This applies to taxpayers in cases involving determination of employment status.

For a taxpayer to classify under this section, 3 statutory requirements need to be met:

  1. Reporting Consistency– The taxpayer must timely file the required information return consistent with its treatment of the non-employee. (If taxpayer claims worker is an independent contractor, forms 1099 must have been filed for the taxable years at issue) If no information return requirement exist, relief will not be denied on the basis that it was not filed. (E.g. if taxpayer the worker was a volunteer, no information returns would be needed)
  2. Substantive Consistency– This is Facts and circumstance determination. A review of the day today services performed, and comparison of the job functions must be done. Just because there may be similar job titles or categories alone are not sufficient.
  3. Reasonable Basis– The taxpayer must reasonably rely on one of the 3 “safe harbors”: 1) prior audit; 2) judicial precedent; or 3) industry practice. The taxpayer must rely on the alleged authority at the time the employment decisions were made for the periods at issue. The statute does not allow ex post facto justification. 

The taxpayer may demonstrate other reasonable basis. This requirement is to be liberally construed in favor of the taxpayer

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