Running your own business is hard. It seems like there’s always a ton of rules to wade through when it comes to every aspect of your business, including when it comes down to hiring employees and independent contractors.
Misclassifying an employee as an independent contractor is an easy mistake to make — but it’s also suspect. Far too many employers misclassify their employees as gig workers on purpose.
Why do employers misclassify their workers?
An employee has the benefit of set wages, a structured pay schedule, overtime pay, health insurance and medical leave. They’re also entitled to workers’ compensation and unemployment insurance. That’s all costly to employers.
Plus, there’s a huge convenience aspect for an employer to pay an employee as an independent contractor. Employers are relieved from their obligation to pay the relevant taxes under the Federal Insurance Contributions Act (FICA) or the Federal Unemployment Tax Act (FUTA), plus they don’t have to worry about collecting taxes from those employees and making quarterly payments to the IRS.
Employee misclassification usually gets uncovered either when an employee tries to file for unemployment benefits or workers’ compensation and finds out — to their surprise — that they aren’t eligible. It can also come to light during a routine audit of the company’s books.
If the IRS decides that employee misclassification occurred without reasonable justification, the businesses can be assessed for back taxes and fines — and the principals could face personal liability under the Trust Fund Recovery Penalty.
What to do when the IRS is calling
Your business and your financial future shouldn’t be at stake over a simple taxation mistake. Talk to an attorney as soon as possible about your situation.