BlogBusinessBusiness FormationEmploymentSmall BusinessStartupsIndependent Contractors: The Reasonable Basis Test

January 20, 2022by Jeffrey Davis

The Reasonable Basis Test:

While the common law test looks at the nature of the working relationship, the reasonable basis test is based on how the courts and the IRS have classified similar workers in your company or your
industry in the past.

The reasonable basis test is considered a “safe harbor.” That is, if you can show you had a reasonable basis for treating a worker as an independent contractor, the IRS is prohibited from
reclassifying the worker as your employee either prospectively or retroactively. You have a reasonable basis for treating a worker as an independent if one or more of the following conditions exist:

A court ruling in favor of treating workers in similar circumstances as non-employees; A ruling by the IRS (usually a Revenue Ruling) stating that similar workers are not employees subject to employment taxes;

An IRS Technical Advice Memorandum or Private Letter Ruling issued to your company, indicating that the particular worker isn’t an employee;

A past IRS payroll audit that didn’t find workers in similar positions at your company to be employees; or

A longstanding, widely recognized practice in your industry of treating similar workers as independent
contractors.

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