The IRS is actively reviewing worker classifications looking for cases where an employer has treated a worker as an independent contractor when they are, in fact, an employee.  They have increased enforcement efforts using the 1099 Matching Program where they look at people who file only one 1099-MISC with their personal return or look at people who file a 1099-MISC for multiple years from the same company.

The penalties could be quite expensive.  The IRS penalty for unintentionally failing to withhold federal income tax is 1.5% of the wages.  This is doubled to 3% if the employer also failed to file a 1099-MISC.  The IRS penalty for unintentionally failing to withhold the employee’s portion of Social Security and Medicare is 20% of the employees’ share of the tax.  This is doubled to 40% if the employer also failed to file a 1099-MISC.

The penalties for intentionally failing to withhold are much higher.  The employer is liable for the full amount of the federal income tax that should have been withheld, and 100% of the employee’s and employer’s share of Social Security and Medicare taxes.  State penalties also apply.

Most issues arise when an employee who was treated as a contractor files for state unemployment benefits.  If you aren’t sure how to treat a worker, please see our Worker Classification brochure or call one of our payroll tax experts for assistance.