Question

How can we differentiate between whether an individual would be considered an independent contractor or a W-2 employee?
What repercussions, if any, does an employer face if they incorrectly identify an employee as an independent contractor?

Answer 1

Employees re paid as salaried or hourly, on commission, or a combination, and may be subject to overtime. Employees are taxed on their income (they receive a W-2 form showing their annual income), and you must also withhold federal and state income taxes and FICA taxes (Social Security and Medicare) from them. Your business must also make FICA tax payments.

In case someone is working as independent contractor, ​you don't withhold federal or state income taxes and FICA taxes from the amounts you pay them. Your business also isn't required to make payments for FICA taxes. The independent contractor must pay their own income taxes.

Employee incorrect classification robs individual workers of their rights and benefits, adversely impacts the effective administration of many federal and state programs, and creates unfair competition for law-abiding employers. The resulting costs and consequences of employee incorrect classification are therefore wide reaching.

1. incorrect classification of employees as independent contractors resulted in lost UI benefits.

2. Companies that incorrect classification their workers have an advantage over law-abiding competitors because they can lower their labor costs