How Will Wrongly Classifying an Employee Affect My Taxes?

One of the reasons why it is important to classify employees correctly is because of the tax consequences. For independent contractors, you will not pay the normal payroll taxes as the worker is responsible for them. If the worker should be an employee, though, you become liable for those taxes you did not pay, which can lead to a huge tax bill.

The CPA Journal explains the IRS will handle the case to determine the back taxes you owe on the worker.

Reason Behind Misclassification

The IRS will conduct an investigation into why you misclassified the worker. It may find that you did so intentionally to avoid taxation or unintentionally because of not understand the worker classification rules. The IRS may also determine that you committed fraud by not properly paying payroll taxes.

Penalties from the IRS

If the IRS determines it was an honest mistake, you will have to pay all the payroll taxes due on wages you paid to the worker. It may not impose additional fines and fees as long as you pay in good faith.

If the IRS feels this was intentional, then it will impose additional fines. You may have to pay an additional percentage of all the wages you owe taxes on. You may also have to pay for the taxes your employees would normally pay. Criminal penalties are also possible if the IRS suspects fraud. These may include time in prison.

The IRS can also hold you personally responsible for unpaid taxes and seize your personal assets to pay them off or take any refund you may have on your personal taxes.

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