Employers gain several benefits by treating workers as independent contractors. Among other factors, you don’t need to withhold or pay income or payroll taxes, make federal unemployment contributions, pay overtime or provide employee benefits. But you must make sure workers are properly classified as independent contractors before taking advantage of these benefits.
If the IRS reclassifies an independent contractor as an employee, your company (as well as certain “responsible persons”) may be liable for unpaid taxes and unemployment contributions, as well as penalties and interest. And don’t share the popular misconception that employers can avoid liability so long as they file Forms 1099 and the workers’ pay all taxes due. Even if you’re not liable for back taxes, the IRS can still hit you with a 20-percent penalty. Plus, the worker may sue you for unpaid benefits, overtime or other perks of employee status.
Before adding new employees or subcontractors your business, be sure you understand the rulings behind each classification. If you are unsure, please call us. We can help answer your questions before they become a liability.