If Walk In Medical Care, Inc. classifies a part-time physician as an independent contractor for federal income tax purposes under the Section 530 safe harbor, does New York State recognize that safe harbor, and what are Petitioner's New York reporting and withholding obligations if the worker would otherwise be an employee for New York personal income tax purposes?

Subject

Whether New York State recognizes the safe harbor provisions of section 530 of the Federal Revenue Act of 1978, and if not, what are the reporting and withholding requirements where a worker is deemed an independent contractor for Federal income tax purposes but is an employee for New York State personal income tax purposes.

Plain-English summary

Petitioner, Walk In Medical Care, Inc., classified a part-time physician as an independent contractor for federal income tax purposes, relying on the "safe harbor" in Section 530 of the Revenue Act of 1978 (as amended, and extended indefinitely by P.L. 97-248 until Congress acts). Petitioner does not withhold federal income tax from the physician and does not issue a Form W-2, but does report the physician's income on Form 1099. Petitioner asked whether New York State recognizes this federal safe harbor and, if not, what New York reporting and withholding obligations would apply if the physician were instead treated as an employee for New York personal income tax purposes.

Section 530 provides that if a taxpayer never treated a worker as an employee for federal employment-tax purposes, filed all federal returns consistently with that treatment, and had a "reasonable basis" for not treating the worker as an employee (for example, reliance on judicial precedent, published rulings, a prior favorable IRS audit, or long-standing industry practice), then the worker is deemed not to be an employee for federal employment-tax purposes. Critically, under IRS Revenue Procedure 85-18, Section 530 does not change the worker's own underlying legal status or rights - it only terminates the employer's federal employment-tax liability. It does not convert someone from employee to self-employed as a matter of law.

New York does not have its own independent test for who counts as an "employee" for withholding purposes. Tax Law § 671(a) requires New York withholding from wages, and Reg. § 171.1(a) requires withholding by New York employers, but Reg. § 171.1(b) directs that the meaning of federal terms like "employer," "employee," and "wages" under the Internal Revenue Code and its regulations applies for New York State personal income tax purposes too, unless New York's own provisions say otherwise or the federal rules are clearly inconsistent with or inapplicable to Article 22.

The Department did not decide, and expressly said it was outside the scope of an Advisory Opinion to decide, whether Petitioner actually meets Section 530's requirements - that is a factual determination, and under Tax Law § 171-Twenty-fourth and 20 NYCRR § 2376.1(a) an Advisory Opinion only applies the law to a stated set of facts. But the Department held that, as a legal matter, if Petitioner does meet Section 530's requirements and the physician is therefore deemed not to be an employee for federal employment-tax purposes, that same non-employee status carries over under Reg. § 171.1(b) and applies for New York State personal income tax withholding purposes as well. If Petitioner does not meet Section 530's requirements, the safe harbor does not apply at all - federally or for New York - and ordinary New York withholding and employee-status rules would govern based on the worker's actual status.

What this means for you

Small medical and professional practices classifying part-time workers as independent contractors

If your practice relies on the federal Section 530 safe harbor to treat a part-time worker (such as a per-diem or part-time physician) as an independent contractor rather than an employee, New York will follow that same classification for personal income tax withholding purposes - you do not need to separately satisfy a New York-specific test. But this only works if you actually qualify for Section 530 federally: you must never have treated the worker as an employee, must have filed all federal returns (including 1099s) consistently with that treatment, and must have a reasonable basis (such as industry practice, a prior clean IRS audit, or published guidance) for the classification. If any of those elements is missing, Section 530 doesn't apply at all, and New York withholding obligations would be based on the worker's true common-law employment status.

Accountants and bookkeepers reconciling federal vs. New York employment-tax treatment

Because Reg. § 171.1(b) imports federal employer/employee definitions into New York's withholding rules, you generally don't need to run a separate New York classification analysis once a client's federal Section 530 position is solid - the same treatment carries through to New York withholding. Your practical work is instead making sure the federal Section 530 elements are actually documented and satisfied (consistent treatment, consistent filing of 1099s rather than W-2s, and a reasonable basis on the record), since that federal determination is what New York's withholding treatment rides on. Keep in mind that Section 530 doesn't resolve the worker's own tax posture - the worker's actual status for the worker's own federal and New York tax liability is a separate question this opinion does not address.

Common questions

Q: Does New York have its own independent test for whether a worker is an "employee" for withholding purposes, separate from the federal Section 530 analysis?
A: No. Reg. § 171.1(b) provides that federal definitions of "employer," "employee," and "wages" under the Internal Revenue Code and its regulations apply for New York personal income tax purposes too, unless New York's provisions say otherwise or the federal rules are clearly inconsistent with Article 22. So if Section 530 validly applies federally, that same non-employee status applies for New York withholding as well.

Q: Did the Department decide in this opinion whether Walk In Medical Care, Inc. actually qualifies for the Section 530 safe harbor?
A: No. The Department expressly stated that determining whether Petitioner has met Section 530's requirements is a factual question outside the scope of an Advisory Opinion, which under Tax Law § 171-Twenty-fourth and 20 NYCRR § 2376.1(a) only applies the law to a specified set of facts. The opinion only addresses what follows legally if Petitioner does (or does not) qualify.

Q: If Section 530 applies to the employer, does that mean the worker is legally an independent contractor rather than an employee?
A: No. Per Rev. Proc. 85-18, Section 530 does not change the worker's own underlying status, liabilities, or rights - it only terminates the employer's federal employment-tax liability for that worker. It does not convert the worker from employee to self-employed as a matter of law; the worker's own tax status and liabilities are a separate matter this opinion does not resolve.

Q: What happens if Petitioner does not meet the requirements of Section 530?
A: Then the safe harbor does not apply at all, either federally or for New York. Petitioner's withholding and reporting obligations would instead depend on the physician's actual employment status under the ordinary rules, and if the physician is in fact an employee, New York withholding under Tax Law § 671(a) and Reg. § 171.1(a) would apply.

Q: Does reporting a worker's income on Form 1099 instead of issuing a Form W-2 automatically satisfy Section 530?
A: Not by itself. Section 530 requires that the taxpayer never treated the individual as an employee, that all federal returns (including information returns like the 1099) were filed consistently with that treatment, and that the taxpayer had a reasonable basis for the non-employee treatment. Consistent 1099 reporting is one part of that showing, but the reasonable-basis requirement and the no-prior-employee-treatment requirement must also be met.

Citations and references

• Tax Law § 671(a) - requires withholding of New York State personal income tax from wages
• Reg. § 171.1(a) - requires New York employers to withhold personal income tax from wages
• Reg. § 171.1(b) - federal definitions of employer, employee, and wages under the Internal Revenue Code apply for New York personal income tax purposes, absent a specific New York provision to the contrary or clear inconsistency with Article 22
• § 530 of the Revenue Act of 1978 (P.L. 95-600), as amended by P.L. 96-167, P.L. 96-541, and P.L. 97-248 - federal safe harbor terminating an employer's employment-tax liability where the employer consistently treated a worker as a non-employee with a reasonable basis for doing so
• Rev. Proc. 85-18, 1985-1 CB 518 - clarifies that Section 530 does not change the worker's own status, liabilities, or rights, and does not convert an employee into a self-employed individual
• Tax Law § 171-Twenty-fourth and 20 NYCRR § 2376.1(a) - limit an Advisory Opinion to applying the law to a specified set of facts, without resolving underlying factual disputes

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a94_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-94 (4) I
Income Tax
March 21, 1994

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I930823E

On August 23, 1993, a Petition for Advisory Opinion was received from Walk
In Medical Care, Inc., 160 Middle Road, Sayville, New York 11782.
The issue raised by Petitioner, Walk In Medical Care, Inc., is whether New
York State recognizes the safe harbor provisions of section 530 of the Federal
Revenue Act of 1978 and if not, what are the reporting and withholding
requirements where a worker is deemed an independent contractor for Federal
income tax purposes but is an employee for New York State personal income tax
purposes.
Petitioner has classified a part-time physician as an independent
contractor for Federal income tax purposes pursuant to the safe harbor provisions
of section 530 of the Revenue Act of 1978. Petitioner does not withhold Federal
income tax from such individual and does not issue a W-2 to the individual.
Petitioner does report the individual's income on Form 1099.
Section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended by P.L.
96-167, P.L. 96-541, and P.L. 97-248, states as follows:
Act Sec. 530(a) Termination of Certain Employment Tax Liability.-­
(1) In General.--If-­
(A) for purposes of employment taxes, the taxpayer did
not treat an individual as an employee for any period,
and
(B) in the case of periods after December 31, 1978, all
Federal tax returns (including information returns)
required to be filed by the taxpayer with respect to
such individual for such period are filed on a basis
consistent with the taxpayer's treatment of such
individual as not being an employee,
then, for purposes of applying such taxes for such period with
respect to the taxpayer, the individual shall be deemed not to be an
employee unless the taxpayer had no reasonable basis for not
treating such individual as an employee.
(2) Statutory Standards Providing One Method of Satisfying the
Requirements of Paragraph (l).--For purposes of paragraph (1), a
taxpayer shall in any case be treated as having a reasonable basis
for not treating an individual as an employee for a period if the
taxpayer's treatment of such individual for such period was in
reasonable reliance on any of the following:
TP-9 (9/88)

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Income Tax
March 21, 1994

(A) judicial precedent, published rulings, technical
advice with respect to the taxpayer, or a letter ruling
to the taxpayer;
(B) a past Internal Revenue Service audit of the
taxpayer in which there was no assessment attributable
to the treatment (for employment tax purposes) of the
individuals holding positions substantially similar to
the position held by this individual; or
(C) long-standing recognized practice of a significant
segment of the industry in which such individual was
engaged.
(3) Consistency Required in the case of Prior Tax Treatment.-Paragraph (1) shall not apply with respect to the treatment of any
individual for employment tax purposes for any period ending after
December 31, 1978, if the taxpayer (or a predecessor) has treated
any individual holding a substantially similar position as an
employee for purposes of the employment taxes for any period
beginning after December 31, 1977.
. . .
ACT Sec. 530(b) Prohibition Against Regulation and Rulings on
Employment Status.--No regulation or Revenue Ruling shall be
published on or after the date of the enactment of this Act and
before the effective date of any law hereafter enacted clarifying
the employment status of individuals for purposes of the employment
taxes by the Department of the Treasury (including the Internal
Revenue Service) with respect to the employment status of any
individual for purposes of the employment taxes.
Act Sec. 530(c) Definitions.--For purposes of this
section-­
(1) Employment Tax.--The term "employment tax" means any tax
imposed by subtitle C of the Internal Revenue Code of 1954.
(2) Employment Status.--The term "employment status" means the
status of an individual, under the usual common law rules applicable
in determining the employer-employee relationship, as an employee or
as an independent contractor (or other individual who is not an
employee).
The relief provided by Act Sec. 530 of the Revenue Act of 1978 has been
extended by P.L. 97-248 from July 1, 1982 until such time as Congress acts in the
future.
Internal Revenue Service Revenue Procedure 85-18 provides instructions for
implementing the provisions of section 530 of the Revenue Act of 1978 and section
3.08 of such revenue procedure states that:

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TSB-A-94 (4) I
Income Tax
March 21, 1994

Section 530 of the act does not change in any way the status,
liabilities, and rights of the worker whose status is at issue.
Section 530(a)(1) terminates the liability of the employer for the
employment taxes but has no effect on the workers. It does not
convert individuals from the status of employee to the status of
self-employed. (Rev Proc 85-18, 1985-1 CB 518)
Section 671(a) of the Tax Law requires the withholding of New York State
personal income tax from wages and provides that the method of determining the
amount to be withheld shall be prescribed by regulation.
Section 171.1 of the New York State Personal Income Tax Regulations
requires the withholding of New York State personal income tax from wages, and
provides as follows:
Section 171.1(a)
Every employer maintaining an office or transacting
business within New York State, and making payment of any wages taxable under
article 22 of the Tax Law to a resident or nonresident individual, must deduct
and withhold from such wages for each payroll period such amount of New York
State personal income tax as will result in withholding from the employee's wages
during each calendar year an amount substantially equivalent to the New York
State personal income tax reasonably estimated to be due as the result of the
inclusion of the employee's wages received during such calendar year in the
employee's New York adjusted gross income.
(b) For purposes of this Article, the provisions of the Federal Internal
Revenue Code and its applicable regulations, with respect to the deducting and
withholding of Federal income tax by employers from wages, including the meaning
of the various Federal terms (such as employer, employee, wages, payroll period,
withholding exemptions), apply for New York State personal income tax purposes,
except as otherwise specifically provided in this Article or where such Federal
rules and definitions are clearly inconsistent with and inapplicable to the
provisions of this Article.
Pursuant to the provisions of section 530 of the Revenue Act of 1978,
certain individuals are deemed not to be employees for purposes of the employment
taxes imposed under the Internal Revenue Code, unless a taxpayer had no
reasonable basis for not treating such individual as an employee. Section
171.1(b) of the New York State Personal Income Tax Regulations states that, with
respect tothe deducting and withholding of Federal income tax by employers from
wages, theInternal Revenue Code and its applicable regulations including the
meaning ofthe term "employee" applies for New York State personal income tax
purposes.
Accordingly, if Petitioner meets the safe harbor provisions of section 530
of the Revenue Act of 1978 and pursuant to such provisions a part-time physician
is not deemed to be an employee of Petitioner for Federal employment tax
purposes, under section 671 of the Tax Law and section 171.1 of the New York
State Personal Income Tax Regulations, such part-time physician is not an
employee of Petitioner for New York State personal income tax purposes.
If Petitioner has not met the requirements of section 530 of the Revenue
Act of 1978, then the safe harbor provisions do not apply. It should be noted,
that it is not within the scope of this Advisory Opinion to determine if
Petitioner has met the safe harbor provisions of section 530.
An Advisory
Opinion merely sets forth the applicability of pertinent statutory and regulatory
provisions to "a specified set of facts." Tax Law, §171.Twenty-fourth; 20 NYCRR

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2376.1(a).
It should also be noted that pursuant to Rev Proc 85-18 supra., the safe
harbor provisions of section 530 of the Revenue Act of 1978 do not apply to the
individual worker, and no determination is made herein as to the status and
liability of the part-time physician for employment taxes for Federal personal
income tax purposes. However, the status accorded such part-time physician for
Federal income tax purposes will also apply for New York State personal income
tax purposes, and his/her New York State employment tax liability and personal
income tax liability will be determined based on such status.

DATED: March 21, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.