The Tax Risks of Misclassifying Employees

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From The National Law Review —

“Employers often prefer to hire independent contractors so that the employer can avoid payment of federal and state employment taxes, federal and state unemployment insurance taxes, employee benefits, and workers’ compensation premiums. The IRS’s concern is that the increasing use of independent contractors in the workplace is leading to a tax gap in lost payroll tax revenue.

While it may seem profitable to label someone as an independent contractor, employers must think twice before doing so because the risks of misclassification are significant. Risks include liability for years of unpaid federal, state and local income tax withholdings and Social Security and Medicare contributions, unpaid workers’ compensation and unemployment insurance premiums. In some cases, the employer may even be responsible for unpaid work-related expenses and overtime compensation. Interest and penalties for non-compliance can be levied along with these penalties, leading to economically devastating consequences for businesses.

In addition to the above penalties, beginning in 2015, pursuant to the Affordable Care Act, large employers (i.e., those with 50 or more employees) that fail to provide the minimum required level of affordable health care to an employee will be assessed an additional penalty of $2,000 per employee. Therefore, it is crucial that employers review their classification titles before this provision becomes effective.”

Read the full story at The Tax Risks of Misclassifying Employees

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