What are the consequences of misclassifying a worker?

In the news and social media recently has been the sad story about a popular service offering classes for homeschool students having to close. In late December 2016, Landry Academy announced “It is with much sadness that we close the doors of Landry Academy.”

I do not know the details of their unfortunate situation, but it seems that there was an IRS requirement for Landry Academy to reclassify their teachers as employees, rather than independent contractors.

You may be wondering: What are the consequences of misclassifying workers?

Here’s what I tell business owners, nonprofit leaders, and anyone else hiring workers:

IRS Penalties

Under Internal Revenue Code section 3509 the penalties for worker misclassification include:

  • Paying a portion of federal income tax (1.5% of payroll),
  • Employer (100%) and employee (20%) shares of FICA taxes
  • Federal unemployment compensation taxes (FUTA).
  • In addition penalties for missed deposits (10%) and withholdings (20%) can be assessed.

Additional penalties include:

  • $50 for each Form W-2 that the employer failed to file because of classifying workers as an independent contractor.
  • A Failure to Pay Taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability.

Other Penalties

That’s pretty bad when you ad it all up, but the list of consequences goes on to include:

  • Penalties for failure to file state and local income tax withholding
  • Penalties due to unemployment insurance shortfalls
  • Worker’s compensation violations
  • Improper exclusion from benefit plans such as pension, retirement plans, health insurance, paid leave, severance pay, etc.

Here’s a long list of The Consequences of Misclassifying Your 1099 Contractors

Scared yet? You probably should be.

Worker misclassification is a serious issue and can cause significant financial hardship and has caused several businesses to close.

Here’s help

My book Paying Workers in a Homeschool Organization can help clear a lot of confusion, but perhaps you want to discuss your particular situation in a private, individual phone consultation.

I offer phone consultations to help you determine if your homeschool organization’s workers are employees or independent contractors. The phone call will be followed up with an email containing a fact-based determination and information to help you take the next steps.

To request a consultation, please contact me. I’m happy to help and relieve any anxiety you have about this confusing topic.

Carol Topp, CPA

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