A: You just may be; the IRS thinks 90% of contractors are misclassified!
- You may believe that hiring an employee and classifying them as an independent contractor (paying them using a 1099) is best and saves you money. Be Careful! The regulations on 1099 contractors vs. W2 employees is a hot topic in court cases today and with one wrong classification you could find yourself in hot water with the IRS, State Departments of Revenue, State Departments of Labor and Workers Compensation Bureaus.
- IRS agents are very motivated to make sure business owners hiring contractors comply with the requirements established in Internal Revenue procedures and publications.
- There is a fine line between employee and contractor classification and, in most cases, W2 employment is the best choice for your staffing needs.
- If the IRS finds you non-compliant, you are looking at fines, penalties and back taxes that can put you out of business.
- Take a look at the ramifications for misclassification:
Liability for failing to deduct and pay taxes – Section 3509
- 1.5% of wages paid to the employee or independent contractor
- 20% of the employee’s share of FICA
- 100% of the employer’s share of FICA
- 100% of the FUTA
- The first two fines are doubled for failure to file Form 1099
- $50 minimum fine for failure to file W2 or 1099 form
- 25% of the unpaid tax liability for failure to file quarterly returns
- .5% of the unpaid tax liability for each month up to 25% for failure to pay taxes
- Section 3509 does not apply when the Employer intentionally disregarded reporting rules. This is referred to as a full rate adjustment. The IRS will attempt to collect 20% of the wages and withholding and 100% of the FICA due – both the employer’s and employee’s share.
Liability under Section 3402(d)
- If the employee fails to pay taxes, the employer is not relieved of its liability for any penalties or additions.
Liability under Section 6672 Personal amounts owed.
- The IRS may collect any amounts due from any person who effectively controls the finances of the business entity. Under this section a 100% penalty may be imposed where the employer had no reasonable basis for believing that withholding was not required.
Liability under Section 7202
- Willful failure to collect or truthfully account for, or pay, taxes is a felony and subject to a fine up to $10,000 and/or 5 years in prison.
State Tax Liabilities and Penalties
- Penalties vary from state to state.
- If due to fraudulent intent to evade tax, 100% of the unpaid tax plus fines and penalties.
Workers’ Compensation Liabilities
- Workers’ compensation penalties vary from state to state.
- Many states charge $1,000 to $1,500 per day for every day you do not have workers’ compensation insurance for an employee.
- Misclassified employees example: 1099 should be W2 and the employee was on your staff for one year – the penalty will range from $365,000 to $547,500. There is no safe harbor.
State Unemployment Taxes (SUTA)
- You will be liable for unpaid tax, fines and penalties as specified by the state.
Stay compliant with EmployShare. Let us limit your risk and liability by correctly classifying your employees.