The IRS released Revenue Procedure 2025-10 (2025-4 I.R.B.), its first major update in four decades to the procedures governing whether a worker is treated as an employee or independent contractor for federal employment-tax purposes. 

This new guidance supersedes Rev. Proc. 85-18 and modernizes how businesses may qualify for Section 530 relief—the statutory safe harbor that can protect employers from back payroll taxes when they have consistently and reasonably treated workers as non-employees. 

Why This Matters for Business Owners 

If your business pays any non-employee workers—consultants, project-based staff, gig workers, or seasonal personnel—this change directly affects your exposure in an IRS employment-tax audit. 

Section 530 relief can eliminate proposed payroll-tax assessments if three conditions are met: 

1. You filed all required 1099 forms correctly (reporting consistency). 

2. You never treated the same or similar workers as employees (substantive consistency). 

3. You had a sound, well-documented reason for classifying them as contractors (reasonable basis). 

Rev. Proc. 2025-10 keeps those core requirements but clarifies and expands how each test works, adding several taxpayer-friendly explanations and also tightening the documentation expectations. 

What’s New in Rev. Proc. 2025-10 

1. Broader “Reasonable Basis” Options 

Businesses now have clearer safe harbors for showing a reasonable basis: 

• Reliance on court decisions or IRS rulings. 

• A prior IRS audit that accepted similar treatment. 

• A long-standing industry practice. 

• New: documented reliance on professional or legal advice, written policies, or contemporaneous factual analysis. 

The IRS emphasizes that the reasoning must exist at the time you decided the worker’s status—not created later. 

 2. Clear Definition of “Treated as an Employee” 

The new procedure specifies that any of these actions count as treating a worker as an employee: 

• Withholding income or payroll taxes. 

• Issuing a Form W-2. 

• Reporting wages on Forms 941 or 940. 

If any of these occur, Section 530 relief is unavailable for that worker for that period. 

3. Dual-Status Worker Guidance 

For the first time, the IRS addresses dual-status individuals—workers who perform some services as employees and others as independent contractors. 

Rev. Proc. 2025-10 allows Section 530 relief to apply to the contractor portion if the services and payments are clearly separate and documented. 

4. Updated Language and Structure 

• Removes obsolete sections on abatement and refund procedures from the 1985 guidance. 

• Incorporates statutory additions to Section 530 made since 1986 (subsections (d), (e), (f)). 

• Aligns terminology with current IRS programs such as the Classification Settlement Program (CSP) and Voluntary Classification Settlement Program (VCSP). 

5. Stronger Emphasis on Documentation 

Taxpayers must be able to prove each requirement individually. 
Relief is available on a worker-by-worker, period-by-period basis—failure for one does not automatically disqualify all others, but missing records can defeat relief entirely. 

Effective Date 

• Issued: January 6, 2025 

• Applied immediately to all open and future IRS employment-tax examinations. 

Key Takeaway 

For many closely-held and small businesses, this update is both a warning and an opportunity: 

• The IRS has modernized and clarified how examiners will test worker classification. 

• Businesses that proactively document their classification rationale and maintain consistent 1099 filings will be best positioned for Section 530 protection. 

• Those with mixed employee/contractor roles or inconsistent filings should review their policies now—before the next audit. 

Next Steps for Business Owners 

1. Review all contractor arrangements and verify that 1099-NEC filings are complete and consistent. 

2. Document your reasonable basis—industry norms, legal advice, or past IRS guidance. 

3. Avoid mixed treatment of similar workers; one misclassified role can jeopardize relief for others. 

4. Consult your tax advisor or CPA to ensure compliance under the updated Revenue Procedure. 

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Under U.S. Treasury regulations, any tax advice in this communication is not intended or written to be used to avoid IRS penalties. Tzinberg & Associates provides this information for general guidance only. It does not constitute tax advice, accounting services, investment advice, or professional consulting. Consult a professional adviser before making decisions or taking action, as the information is provided "as is" without any warranties regarding its completeness, accuracy, or timeliness.