Are you an employer paying workers as independent contractors? Be careful – misclassifying employees can lead to major penalties and legal issues down the line. One common scenario is hiring someone and paying them with no taxes withheld because it seems convenient for both parties. However, this creates risks if that person later files for unemployment benefits or blows the whistle on being misclassified.
If investigated by the Department of Labor or IRS, they’ll look at factors like:
Flexibility of when/how the work is done
Whether the worker offers services to others
How pay is determined (hourly vs flat rate)
Who dictates procedures and provides materials
Who covers travel costs
If the evidence points to an employer-employee relationship despite being paid as a contractor, you could face charges of payroll tax fraud and avoidance. The penalties can be enormous, like $10,000+ per violation in some states.
It may seem easier to avoid payroll taxes, workers’ comp, etc. by calling someone a contractor. But treating employees as such is illegal and a huge liability. The smarter move is to properly classify workers and pay the associated taxes/insurance.
A little extra payroll cost is far better than risking crippling fines and legal troubles for misclassification down the road. Be cautious when working with contractors vs employees.
