In: Accounting
What are the tax consequences to an EMPLOYER of classifying a worker as an employee vs. an independent contractor?
Tax consequences to an EMPLOYER of classifying a worker as an employee vs. an independent contractor
Classifying a worker as an employee or an independent contractor has a significant effect on the cost of employing that individual. Intentionally or not, many workers in the United States are classified as independent contractors (IC). In classifying a worker as an IC instead of an employee, employers can eliminate the following expenses:
For the independent contractor, the company does not withhold taxes. Employment and labor laws also do not apply to independent contractors.
Misclassification also causes federal, state, and local governments to suffer revenue losses as employers circumvent their tax obligations.Federal employment withholding taxes represent nearly 70% of all federal tax revenue to be paid to the IRS, which seeks back taxes and penalties from employers that wrongly treat workers as self-employed contractors.
Some civil penalities for misclassification of employee as an Independent contractor is given below:
Federal penalties for worker misclassification can be severe. Ramifications vary depending on whether the misclassification was unintentional, intentional, or even fraudulent.