Independent Contractor vs Employee
If a worker is classified as an independent contractor and they are deemed an employee by the IRS, the employer could face serious penalties. The employer is liable for its share of FICA* and FUTA* but also subject to additional penalties equal to 20% of the FICA that should have been withheld. This if is the employer complied a 1099 and treated them as an Independent Contractor. If they employer did not compile a 1099 then the penalty increases to 40% of Fica and 3% of wages. This is for the accidental misclassification. If the employer deliberately misclassified the employer then the fines are substantially higher.
Why is this important to the IRS?
The IRS estimates that it loses 3.3 billion, yes BILLION, dollars a year in uncollected taxes that should have been paid by employers and employees. The IRS has a huge stake in the location and penalization of violaters. Be sure that your company is in compliance with IRS taxation rules and classify your workers properly.
FICA- A tax on employees and employers that is used to fund the Social Security system.
FUTA- A United States federal law that imposes a federal employer tax used to fund state workforce agencies.