The Penalties for Misclassifying Independent Contractors

Misclassifying employees as independent contractors can be very expensive.

Recently a company in Louisiana agreed to pay nearly $250,000 in penalties for improperly classifying employees as independent contractors. Specifically, “…an electrical contractor based in New Iberia, Louisiana – has paid $249,278 in back wages to 117 employees” according to the press release from the USDOL. The employer was charged with not paying required overtime and improper recordkeeping.

Also the IRS

Unfortunately for this employer, the problems will most likely not stop there. In not treating these workers as employees the employer also failed to pay taxes and social security on these the employees, and the IRS is going to want their piece. I wrote about this back in 2015 in Do you know the penalties for improperly classifying employees as Independent Contractors? The list is long and includes:

  • You have not paid an “employee” correctly. You may have missed overtime.
  • You have not recorded work time correctly.
  • You have not filed the appropriate federal and state tax forms.
  • You may not have made appropriate contributions to retirement plans.
  • You may not have complied with the ADA.
  • You may not have provided them with the appropriate protections under either OSHA or the NLRA.
  • You may not have been paying appropriate workers’ comp premiums.
  • You may not have given them the appropriate benefits notices and statements.

I would suggest you read that blog post if you find yourself in this situation.

Financial penalties

I in 2017, the blog Justworks, detailed the financial penalties associated with this type of mistake. Those included:

  • $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 daily from the date they should have been deposited.
  • 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.

And that is if the IRS feels your mistakes were unintentional. If they thought you had purposely made the error in misclassification a lot more is involved. According to Justworks, these include:

  • The employer could be subjected to penalties that include 20% of all of the wages paid, plus 100% of the FICA taxes, both the employee’s and the employer’s share.
  • Criminal penalties of up to $1,000 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 tax.

As you can see these penalties can be hefty and damaging. It pays to make sure you have workers properly classified.

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