Guidance clarifies relief for worker misclassification

The IRS recently released guidance (Rev. Rul. 2025-3 and Rev. Proc. 2025-10) clarifying relief for employers’ federal employment tax liability under section 530 of the Revenue Act of 1978.

Section 530 provides relief for the employment tax liability of any employer that improperly treats a worker as a non-employee. Certain requirements — reporting consistency, substantive consistency and reasonable basis — must be met in order to rely on section 530 relief. This relief applies only to employers and does not extend relief to the workers, who may still have liability.

Rev. Rul. 2025-3 provides five fact patterns and details whether section 530 or the reduced rates of IRC Section 3509 (which provides reduced rates if an employer fails to withhold income or the employee portion of social security tax) applies when the employer improperly treated the worker as a non-employee. The revenue ruling also establishes whether the IRS will issue a Notice of Employment Tax Determination (a Section 7436 Notice) in each scenario.

Rev. Proc. 2025-10 modifies and supersedes Rev. Proc. 85-18 to modify the definition of “employee” under Section 530, to update the section 530 requirement for the filing of required returns and the reasonable basis safe harbor rules. Rev. Proc. 2025-10 also interprets the word “treat” for purposes of determining whether an employer did not treat a worker as an employee for purposes of Section 530(a) and makes various changes to reflect the statutory changes to Section 530 since 1986.