Liberalized worker classification rules provide options for employers.

• Author: Goldberg, Walter S.
• Position: Brief Article

New worker classification rules enacted as part of the Small Business Job Protection Act of 1996 (SBJPA) should provide more options to employers. The new law clarifies and modifies the rules governing so-called Section 530 relief, which allows a taxpayer to treat a worker as an independent contractor rather than as an employee for employment tax purposes in specific circumstances. These changes will affect the classification of worker commencing after 1996.

Clarifications of industry-practice safe harbors in the SBJPA provide that: (1) arguments that a "significant segment" of an industry follows a practice do not require a reasonable showing of the practice for more than 25% of an industry and (2) an industry practice need not have continued for more than 10 years for it to be considered long-standing. The legislation also changes the prior audit safe harbor; taxpayers may not rely on an audit beginning after 1996, unless such audit includes an examination for employment tax purposes of whether the worker involved (or any worker holding a substantially similar position to the position held by the worker involved) should be treated as an employee of the taxpayer. This provision is not intended to affect the ability of taxpayers to rely on prior audits that began before...