What Happens If You Misclassify An Employee As A Contractor?

Aside from the fact that Independent Contractors are simply not employees therefore you cannot treat them as if they are, if you do, you could be in a world of hurt, again even if it seems incredibly insignificant. That is why the title says an employee as a contractor because you actually treated the contractor as an employee and therefore the below can happen...


The repercussions can vary, but these are some that you can absolutely count on happening.


🔹$50 fine for each W-2 Form the Employer (they are now an employer since they treated you as an employee) failed to file due to the misclassification


🔹Since the business neglected to withhold income taxes, they can face penalties of 1.5% of the wages, plus 40% of Social Security and Medicare (FICA) that were not withheld from the employee and 100% of the matching Social Security and Medicare (FICA) taxes the employer should have paid.


The IRS charges interest on these amounts from the date these should have been paid!


🔹A Failure to Pay Taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability.


🔹If the IRS suspects fraud or intentional misconduct, they can impose additional fines and penalties. Ex. The employer could be subjected to penalties that include 20% of all of the wages paid, plus 100% of the Social Security and Medicare (FICA) taxes, both the employee's and the employer's share.


🔹Individual criminal penalties can be imposed as well of up to $1,000 per misclassified worker and one year in prison! The individual who was responsible for withholding taxes could also be held personally liable for any uncollected tax.


Come back for the last post in this series to get more in-depth explanations and examples of treating a contractor like an employee as mentioned above, some items can really be very tiny and insignificant but still get you in trouble.


-MW




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