What are the penalties for classifying Employees as Independent Contractors?
The IRS is constantly auditing companies to find out if they have classified their employees as independent contractors. Companies that are not classifying workers correctly can be assessed penalties that are over $1000 per employee plus back taxes and even prison time.
The penalties that may be assessed for classifying independent contractors as employees are as follows:
- $50 for each Form W-2 that the employer failed to file because of classifying workers as an independent contractor.
- Since the employer failed to withhold income taxes, it faces penalties of 1.5% of the wages, plus 40% of the FICA taxes, (Social Security and Medicare) that were not withheld from the employee and 100% of the matching FICA taxes the employer should have paid. Interest is also accrued on these penalties calculated from the date they should have been deposited.
- Criminal penalties of up to $1000 per misclassified worker and one year in prison can be imposed as well. In addition the person responsible for withholding taxes could also be held personally liable for any uncollected taxes.
- Misclassifying employees as independent contractors and failing to provide W-2 forms can subject an employer to back taxes of as much as 41.5%* of the contractors’ wages, according to the IRS. And these penalties can go back for three years.
If the IRS thinks you intentionally classified workers incorrectly they may seek a criminal conviction with up to a year in jail and a fine as high as $500,000. Plus you get the label “tax evader.” The independent contractor themselves may be audited and may be forced to repay any business deductions they took during that time.
It is critical that workers are extremely important that workers are classified correctly. Companies that classify their employees as independent contractors will be targeted by the IRS and will be assessed large fines and possibly even jail time.
If you believe you have workers that are not classified correctly this email education series will help. You may also feel free to call or email me directly for assistance my email is firstname.lastname@example.org.