The employer’s Safe Harbor is a set of legal protections found in a footnote to the Internal Revenue Code. It is called Safe Harbor protection because it provides employers with a refuge from the cold winds and turbulent waters of an IRS audit. If you meet the three requirements for Safe Harbor protection discussed below, the IRS can’t impose assessments or penalties against you for worker misclassification, and you can safely and confidently treat the workers involved as ICs.
The Safe Harbor was intended to help employers, who often have a difficult time determining how to classify their workers under the IRS common law test. If the Safe Harbor requirements are met, an employer may treat a worker as an IC for payroll tax purposes even if the worker should have been classified as an employee under the common law test discussed in Step Two.
Unfortunately, experience has shown that few employers are able to take advantage of the Safe Harbor. Most can’t satisfy the three requirements discussed in this section. However, this doesn’t mean you can’t satisfy them. If you think a worker should be classified as an employee under the common law test, or you’re not sure how to classify a worker under the test, look at the Safe Harbor rules carefully. If you can meet them all, you can treat the worker as an IC for payroll tax purposes.
To receive Safe Harbor protection for a worker, you must do all of the following three things:
- file all required 1099-MISC forms for the worker
- consistently treat the worker—and others doing substantially similar work to that worker—as an IC , and
- have a reasonable basis for treating the worker as an IC.
Caution Safe Harbor Applies Only to Federal Payroll Taxes
If a worker receives Safe Harbor protection, you can safely treat that worker as an IC for the purposes of federal payroll taxes. However, that same worker might still be considered an employee under other rules, such as federal pension plan rules and state rules.