rr-25-03.pdf

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I.R.C. Section 3509—Determination of Employer's Liability for Certain Employment
Taxes
(Also: I.R.C. Section 7436 and Section 530 of the Revenue Act of 1978)

Rev. Rul. 2025-3

ISSUES
1. Whether section 530 of the Revenue Act of 1978, Pub. L. No. 95-600, as
amended (section 530), or the reduced rates of § 3509 of the Internal Revenue Code
(the Code) apply in the five situations set out below.
2. Whether the Internal Revenue Service (IRS) will issue a Notice of
Employment Tax Determination Under IRC § 7436 (§ 7436 Notice) in the five situations,
set out below.
FACT SITUATIONS
Situation 1. Taxpayer (TP) hires individuals who provide services to TP during
the year. For those services, TP pays each individual a weekly fixed amount and a
weekly bonus amount. TP does not withhold or pay federal employment taxes with
regard to any of the payments and reports the total amount of the fixed weekly amounts
and the weekly bonus amounts on Form 1099-NEC “Nonemployee Compensation.”
During an audit of TP by the IRS for the year, the IRS determines (1) that TP does not
meet the statutory requirements for section 530 relief, and (2) that the individuals are
employees of TP. The IRS proposes to assess federal employment taxes on the

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weekly fixed amounts and the weekly bonus amounts, which should have been reported
as wages on Form 941 “Employer’s QUARTERLY Federal Tax Return,” and Forms W-2
“Wage and Tax Statement.” TP claims it satisfies the statutory requirements for section
530 relief and does not agree that the individuals are its employees.
Situation 2. TP employs individuals who perform services during the year. TP
treats the individuals as employees for the services that they perform. For those
services, TP pays each individual a weekly salary and a weekly bonus amount. TP
treats the weekly salary as wages for federal employment tax purposes. TP withholds
and pays federal employment taxes with respect to the weekly salary and reports the
salary and federal employment taxes on Form 941 and Forms W-2. TP does not treat
the weekly bonus amounts as wages for federal employment tax purposes. It does not
withhold or pay any federal employment taxes with regard to the bonus amounts and
reports the bonus amounts on Forms 1099-NEC. During an audit of TP by the IRS for
the year, the IRS concludes that the bonus amounts are wages. The IRS proposes to
assess federal employment taxes on the bonus amounts, which should have been
reported as wages on Form 941 and Forms W-2. TP claims it satisfies the statutory
requirements for section 530 relief with respect to the bonus amounts and does not
agree that the bonus amounts are wages.
Situation 3. Same facts as situation 2 except TP does not report the weekly
bonus amounts on Forms 1099-NEC or any other information return.

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Situation 4. Same facts as situation 2 except TP does not report the weekly
bonus amounts on Forms 1099-NEC or any other information return and does not claim
it satisfies the statutory requirements for section 530 relief with respect to the bonus
amounts.
Situation 5. TP employs individuals who perform services during the year. TP
enters into a contract with a third party (3P) to pay each individual a weekly salary,
withhold and pay federal employment taxes, and file federal employment tax returns.
1

3P pays the weekly salaries, withholds, pays federal employment taxes, and reports the
weekly salaries and taxes on Form 941 and Forms W-2 using its own employer
identification number (EIN). In December of that same year, TP pays a year-end bonus
amount directly to each individual for the individual’s services during the year but does
not treat the year-end bonus amounts as wages. TP does not withhold or pay any
federal employment taxes or report the bonus amounts on any information return.
During an audit of TP by the IRS for the year, the IRS concludes that the bonus
amounts are wages. The IRS proposes to assess federal employment taxes on the
bonus amounts, which should have been reported as wages on Form 941 and Forms

1
A taxpayer may choose to enter into an agreement with a third party in which the third party agrees to
perform some or all of the employer’s federal employment payment, withholding, and reporting
responsibilities. For purposes of simplicity, this revenue ruling does not address the different variations of
third-party payor arrangements, and assumes 3P correctly used its own EIN. However, depending on the
facts and circumstances and the type of arrangement, an employer who uses a third party to perform
federal employment tax functions on its behalf may remain solely liable for federal employment taxes,
may become jointly and severally liable for such taxes, or may be relieved of liability for such taxes. This
revenue ruling does not address which party will be ultimately liable for any unpaid employment taxes, as
these discussions are beyond the scope of this revenue ruling.

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W-2. TP claims it satisfies the statutory requirements for section 530 relief with respect
to the bonus amounts and does not a gree the bonus amounts are wages.
LAW AND ANALYSIS
An employer is liable for federal employment taxes on wages paid to employees.
Federal employment taxes include Federal Insurance Contributions Act (FICA) taxes,
Railroad Retirement Tax Act (RRTA) taxes,
2
Federal Unemployment Tax Act (FUTA)
taxes, and the collection of income tax at source on wages (income tax withholding).
In general, § 3102 of the Code requires an employer to withhold and pay
to the
IRS the employee share of FICA taxes
from wages when paid to the employee.
Furthermore, § 3111 generally also requires the employer to pay to the IRS the
employer share of FICA taxes at the same time. Section 3121(a) defines “wages” for
FICA tax
purposes as all remuneration for employment, including the cash value of all
remuneration (including benefits) paid in any medium other than cash, unless
specifically excepted. Section 3121(b) generally defines "employment" as any
service,
of whatever nature, performed by an employee for the person employing him unless a
s
pecific exception applies. Similarly, § 3301 imposes on every employer an obligation
to pay FUTA taxes on wages as defined in § 3301b). Section 3306(b) and (c) contain
similar definitions to FICA for “wages” and “employment,” respectively, for FUTA tax
2
For purposes of simplicity, this revenue procedure does not discuss the application of these rules to
RRTA. However, rules similar to those discussed with respect to Section 530 apply for purposes of
determining whether a taxpayer will not be liable for RRTA taxes, with respect to an individual or class of
workers (though the reduced rates of § 3509 discussed in this revenue procedure do not apply for
purposes of RRTA).

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purposes. Section 3402(a) imposes the obligation on an employer to withhold income
taxes from wages as defined in § 3401(a). Section 3401(a) provides that the term
“wages” means all remuneration for services performed by an employee for his
employer including the cash value of all remuneration (including benefits) paid in any
medium other than cash, unless a specific exception applies.
The definitions of “wages” and “employment” for FICA, FUTA, and income tax
withholding purposes are premised on an individual being an employee and are not
applied when an individual is properly classified as an independent contractor or has
some other non-employee status. If an individual is properly classified as an
independent contractor, the individual’s earnings are subject to self-employment tax,
which consists of social security and Medicare taxes, if the other requirements for
reporting self-employment taxes are met. There is no FUTA tax for self-employed
individuals.
For employment tax purposes, an employee generally is any individual who,
under the usual common law rules applicable in determining the employer-employee
relationship, has the status of an employee. See §§ 31.3121(d)-1(c), 31.3306(i)-1, and
31.3401(c)-1 of the Employment Tax Regulations. Generally, an employer-employee
relationship exists when the person for whom services are performed has the right to
direct and control the individual who performs the services, not only as to the result to
be accomplished by the work but also as to the details and means by which that result
is accomplished. That is, an employee is subject to the direction and control of the

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employer not only as to what shall be done but how it shall be done. Individuals who
are not employees under the common law rules may still be employees by statute under
certain FICA, FUTA, and income tax withholding provisions. See, e.g., § 3121(d) and
the accompanying regulations.
Section 530 provides that a taxpayer will not be liable for federal employment
taxes, with respect to an individual or class of workers, if certain statutory requirements
are met.
3
Under section 530, the taxpayer, not the individual worker
4
, is entitled to relief
from the employment tax liability that would otherwise apply under subtitle C of the
Code, and any related interest or penalties attributable to that employment tax liability.
The taxes imposed by subtitle C include FICA taxes, RRTA taxes, FUTA taxes, and
income tax withholding.
Section 530 relief applies only if the taxpayer did not treat the individual as an
employee for federal employment tax purposes for the period at issue and meets each
of the following requirements for such period: (1) the taxpayer filed
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all required federal
tax returns, including information returns, consistent with the taxpayer’s treatment of the

3
Section 530 (entitled “Controversies Involving Whether Individuals are Employees for Purposes of
Employment Taxes”) was originally enacted as a temporary measure to provide relief for taxpayers who
were involved in employment status (worker classification) disputes with the IRS, and who faced large
employment tax assessments as a result of the IRS’s proposed reclassifications of workers. Section 530
was extended indefinitely by the Tax Equity and Fiscal Responsibility Act of 1982. Section 530 is not
part of the Internal Revenue Code (Code).
4
Section 530 relief does not extend to individual workers, who remain liable for their personal income
taxes and the employee share of FICA taxes.

5
In no event will a return filed after the date on which the IRS first contacts the taxpayer concerning an
examination of the period to which the return relates be considered as filed on a basis consistent with
good faith treatment by the taxpayer of an individual as a non-employee. Additionally, section 530 relief is
not available for any year and for any worker for whom the taxpayer did not file the required returns.

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individual as not being an employee (reporting consistency requirement); (2) the
taxpayer did not treat the individual or any individual holding a substantially similar
position as an employee (substantive consistency requirement); and (3) the taxpayer
had a reasonable basis for not treating the individual as an employee (reasonable basis
requirement). A taxpayer will be treated as having a reasonable basis if the taxpayer's
treatment was in reasonable reliance on any of the following:
(a) judicial precedent, published rulings, technical advice with respect to
the taxpayer, or a letter ruling to the taxpayer (judicial precedent);
(b) a past IRS audit of the taxpayer in which there was no assessment
attributable to the treatment (for employment tax purposes) of the individuals
holding substantially similar positions (prior audit);
(c) long-standing recognized practice of a significant segment of the
industry in which that individual was engaged (industry practice); or
(d) some other reasonable basis for not treating the individual as an
employee.
Section 530 relief applies only to controversies involving the proper classification
of individuals as employees or non-employees. Section 530 is not applicable when a
taxpayer treated an individual as an employee and then paid additional compensation to
the employee for the same services but failed to characterize the payment as wages.
This includes situations where the taxpayer contends that the payment does not meet
the definition of wages because the payment is a lease payment, bonus,

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reimbursement, severance payment, dividend, or other comparable characterization,
but the payment is, in fact, paid solely for the individual’s service as an employee.
Section 530(a)(1)(A) provides that a taxpayer is entitled to relief if the taxpayer
“did not treat an individual as an employee for any period” for purposes of employment
taxes (emphasis added). Legislative history demonstrates that section 530 applies
exclusively to taxpayers involved in employment status controversies with the IRS. The
legislative history explains that the relief measure was for taxpayers that were “involved
in employment tax status controversies with the [IRS], and who potentially face large
assessments, as a result of the [IRS’s] proposed reclassifications of workers” and
explains that the bill prevents the IRS from reclassifying as employees certain
individuals whom the taxpayer has previously treated as independent contractors. S.
Rep. No. 95-1263, at 210 (1978).
In determining whether a taxpayer did not “treat” an individual as an employee
within the meaning of section 530, Rev. Proc. 2025-10, 2025-4 IRB XX, modifying and
superseding Rev. Proc. 85-18, 1985-1 CB 518, provides a list of guidelines used to
determine whether there was “treatment” of an individual as an employee for a period
within the meaning of section 530(a)(1). Among other actions, with respect to any
individual, the following indicate “treatment” of the individual as an employee: the
withholding of income tax or FICA taxes from any payments made; the filing of an
original or amended employment tax return; the filing or issuance of a Form W-2; and
the contracting with a third party to perform acts required of employers.

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In enacting section 530, Congress looked to the taxpayer’s treatment of the
individual, not to the characterization of particular payments made to the individual. If
an employer treated the individual as an employee, section 530 relief is not applicable
to a dispute involving characterization of particular payments because the worker is not
being reclassified from non-employee to employee status.
6
Thus, section 530 does not
apply to controversies concerning whether a particular type of payment made to an
employee constitutes “wages” as defined under the FICA, FUTA, or income tax
withholding provisions, or whether particular services performed by an employee
constitute “employment,” as defined under the FICA, FUTA, or income tax withholding
provisions.
If an employer failed to properly treat an individual as an employee, and the
employer does not meet the statutory requirements for section 530 relief, the employer
may be eligible for relief under § 3509 of the Code. Section 3509(a) allows an employer
to remit unpaid taxes at reduced rates if an employer fails to deduct and withhold
income tax or the employee share of FICA tax with respect to any of its employees
because the employer treated that employee as a non-employee. Pursuant to §
3509(c), the reduced rates do not apply to the determination of the employer’s liability

6
In unusual cases, an individual may perform services for a taxpayer that are completely separate and
distinct from the services giving rise to the employment relationship, and is separately compensated for
those services. To be completely separate and distinct, there must be no interrelation either as to duties
or remuneration in the two capacities. Compare Rev. Rul. 58-505, 1958-2 CB 728, with Rev. Rul. 2004-
109, 2004-2 CB 958, and Rev. Rul. 2004-110, 2004-2 CB 960. In these circumstances, the status of the
individual as an employee or non-employee, and the application of section 530, will be considered
separately with respect to the distinct relationships under which the separate services are provided
.

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for income tax withholding or the employee portion of FICA tax if such liability is due to
the employer’s intentional disregard of the requirement to deduct and withhold such
taxes.
The concept of “treatment” of an individual as not being an employee in § 3509 is
similar to “treatment” in section 530. The legislative history indicates that § 3509 of the
Code was intended to provide relief for employers in cases in which a worker treated as
a non-employee by the employer is reclassified by the IRS as an employee, and to
deter employers from misclassifying employees to avoid employment taxes.
7

Similar to section 530, if an employer treated an individual as an employee,
§ 3509 of the Code will not apply since the worker is not being reclassified from non-
employee to employee.
8
Thus, § 3509 is not applicable when determining whether
particular payments made to an employee are “wages” or whether particular services
performed by an employee are “employment” as defined under the FICA, FUTA, or
income tax withholding provisions.
Section 7436 of the Code provides that the Tax Court may review two types of
employment tax determinations made by the IRS and the proper amount of employment
tax, penalties, and additions to tax resulting from the determinations.

7
See Staff of Joint Committee on Taxation, 97th Cong., General Explanation of the Revenue Provisions
of the Tax Equity and Fiscal Responsibility Act of 1982 (JCS-38-82), at 384-86 (Comm. Print 1982); H.R.
Rep. No. 97-760, at 650-52 (1982) (Conf. Rep.); S. Rep. No. 97-494, Vol. 1, at 370-72 (1982).
8
As stated in footnote 5, an individual may perform services for a taxpayer that are completely separate
and distinct from the services giving rise to the employment relationship, and is separately compensated
for those services. In these circumstances, the status of the individual as an employee or non-employee,
and the application of § 3509, will be considered separately with respect to each of the distinct
relationships under which the separate services are provided.

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In order to obtain Tax Court review, the following elements must be present:
(1) an examination in connection with the audit of any person;
(2) a determination that –
(a) one or more individuals performing services for such person are
employees of such person for purposes of subtitle C, or
(b) such person is not entitled to relief under section 530(a) with respect to
such an individual;
(3) an “actual controversy” involving the determination as part of an examination;
and
(4) the filing of an appropriate pleading in the Tax Court.
See American Airlines Inc. v. Commissioner, 144 T.C. 24, at 32 (2015). When the first
three elements are met, the IRS will issue a § 7436 Notice. A taxpayer will satisfy the
fourth element by filing a timely petition for review of the § 7436 Notice with the Tax
Court. Revenue Procedure 2022-13, 2022-6 IRB 477, superseding Notice 2002-5,
2002-1 CB 320, provides guidance concerning when and how the IRS will issue a
§ 7436 Notice that will document the determination necessary to give the taxpayers the
option to petition for Tax Court review. The IRS will not issue a § 7436 Notice if the
taxpayer has agreed to the employment tax liabilities. Agreement is generally
accomplished using Form 2504-T “Agreement to Assessment and Collection of
Additional Employment Tax and Acceptance of Overassessment (Employment Tax
Adjustments Subject to IRC 7436).”
HOLDINGS

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Holding 1. Section 530 is applicable to this situation because the TP did not
treat the individuals as employees, and the IRS is reclassifying the individuals as
employees. Whether TP is entitled to section 530 relief depends on whether the TP
satisfies the substantive consistency, reporting consistency, and reasonable basis
requirements. If section 530 does not apply, § 3509 of the Code may be applicable
because the TP treated the individuals as non-employees and did not deduct and
withhold federal employment taxes from the weekly fixed amounts and bonus amounts
that it paid to the individuals, and the IRS is reclassifying the individuals as employees.
Whether TP is entitled to § 3509 reduced rates depends on whether it meets the
statutory requirements in § 3509. The IRS will issue TP a § 7436 Notice at the
conclusion of the audit or after Appeals consideration if no agreement is reached. A
§ 7436 Notice will be issued because (1) there was an examination in connection with
an audit, (2) there were determinations that (a) the individuals were employees of TP,
and (b) TP was not entitled to relief under section 530 with respect to these individuals
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,
and (3) the IRS and TP disagree on the employment status of the workers and whether
the statutory requirements for section 530 relief have been met (there is an actual
controversy involving the determination as part of the audit).
Holding 2. Section 530 is not applicable to this situation because the IRS is not
reclassifying the individuals as employees. TP treated the individuals as employees for
the services they performed and paid additional wages in the form of bonuses for the

9
If the IRS were to make only one of these determinations, a § 7436 Notice would still be issued.

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same services; there is no controversy over whether the individuals are employees or
independent contractors with respect to their services.
10
The reduced rates under
§ 3509 of the Code are not applicable for the same reason. The IRS will issue TP a
§ 7436 Notice at the conclusion of the audit or after Appeals consideration if no
agreement is reached. A § 7436 Notice will be issued because (1) there was an
examination in connection with an audit, (2) a determination was made that TP was not
entitled to relief under section 530 with respect to the bonuses paid to the individuals,
and (3) the IRS and TP disagree on whether the statutory requirements for section 530
relief have been met (there is an actual controversy involving the determination as part
of the audit).
Holding 3. Section 530 and § 3509 of the Code are not applicable to this
situation for the same reasons stated in Holding 2. The IRS will issue TP a § 7436
Notice at the conclusion of the audit or after Appeals consideration if no agreement is
reached. A § 7436 Notice will be issued because (1) there was an examination in
connection with an audit, (2) a determination was made that TP was not entitled to relief
under section 530 with respect to the bonuses paid to the individuals, and (3) the IRS
and TP disagree on whether the statutory requirements for section 530 relief have been
met (there is an actual controversy involving the determination as part of the audit).

10
Compare SECC Corp. v. Commissioner, 142 T.C. 225, 235 (2014) (dispute over “whether petitioner's
workers can serve in a dual capacity”).

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Holding 4. Section 530 and § 3509 of the Code are not applicable to this
situation for the same reasons stated in Holding 2. The IRS will not issue TP a § 7436
Notice at the conclusion of the audit or after Appeals consideration if no agreement is
reached because TP did not claim that TP was entitled to relief under section 530
concerning the bonuses paid to the individuals, and there is no controversy over
whether the individuals are employees or independent contractors.
Holding 5. Section 530 is not applicable to this situation because the IRS is not
reclassifying the individuals as employees. The year-end bonus amounts are additional
wages for the same services performed by the individuals who were treated as
employees by TP. The reduced rates under § 3509 of the Code are not applicable for
the same reason. The IRS will issue TP a § 7436 Notice at the conclusion of the audit
or after Appeals consideration if no agreement is reached. A § 7436 Notice will be
issued because (1) there was an examination in connection with an audit, (2) a
determination was made that TP was not entitled to relief under section 530 with
respect to the year-end bonus amounts paid to the individuals, and (3) the IRS and TP
disagree on whether the statutory requirements for section 530 relief have been met
(there is an actual controversy involving the determination as part of the audit).
DRAFTING INFORMATION
The principal author of this revenue ruling is Kelli Cacciotti of the Office of
Associate Chief Counsel (Employee Benefits, Exempt Organizations and Employment

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Taxes). For further information regarding this revenue ruling, contact Ms. Cacciotti at
(202) 317-6798 (not a toll-free call).