Classification with the IRS

Emory must ensure that individuals are properly classified as an employee or an independent contractor to meet IRS guidelines. Proper worker classification is important because it has a huge influence on how workers are paid. The difference between how an employee and independent contractor are treated comes down to the taxes that must be paid on wages and benefits each worker is eligible for.

Proper Worker Classification Affects

ItemEmployeeIndependent Contractor
Taxes and BenefitsEmployees' wages are generally subject to Unemployment Insurance Tax, Workers Compensation, Social Security and Medicare Taxes. They are also eligible for overtime and benefits including health insurance, retirement, paid time off, holiday pay, etc.Independent Contractors generally do not receive benefits because they perform their services in a manner determined by themselves instead of their employer. In addition, no taxes are paid on their wages.
Tax FilingEmployees receive a W-2 at year end from their employer.Independent Contractors receive a 1099-MISC at year end from the employer.
Business-Related ExpensesBusiness-related expenses are generally paid for by the employer.Business-related expenses are generally paid for by the Independent Contractor.
Fines and Penalties

If the worker was classified as an independent contractor instead of an employee, and it was unintentional, the employer faces at least the following penalties, (based on the fact that all payments to misclassified independent contractors have been reclassified as wages):

  • Wages that should have been paid to them under the Fair Labor Standards Act, including overtime and maximum wage; Back taxes and penalties for federal and state income taxes, Social Security, Medicare and Unemployment; Any misclassified injured employee's worker's compensation benefits; Employee benefits including health insurance, retirement, etc.
  • $50 for each Form W-2 that the employer failed to file because of classifying the worker as an independent contractor.
  • Since the employer failed to withhold income taxes, it faces penalties of 1.5% of the wages, plus 40% of the FICA taxes (Social Security and Medicare) that were not withheld from the employee and 100% of the matching FICA taces the employer should have paid. Interest is also accrued on these penalties daily from the date they should have been deposited.
  • A Failure to Pay Taxes penalty equal to 0.5% of the unpaid liability for each month up to 25% of the total tax liability.
  • If the IRS suspects fraud or misintentional misconduct, it can impose additional fines and penalties. For instance, the employer could be subjected to penalties that include 20% of all the wages paid, plus 100% of the FICA taxes, both the employee's and the employer's share.
  • Criminal penalties of up to $1,000 per misclassified worker and one year in prison can be imposed as well. In addition, the person responsible for withholding taxes could also be held personally liable for any uncollected tax.