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Employees vs Contractors EBook US

Free Payroll eBooks for Small Business Owners and Startup Founders in the United States & Canada

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Page 17 of 19

Unintentionally classifying an employee as a contractor will result in some financial liability (if an IRS Form 1099 has been filed): generally 1.5% of salary of the federal income tax withholding amount, plus 20% of FICA taxes paid by the employee, plus all of what the employer should have paid. However, if no IRS Form 1099 has been sent in, but it is still unintentional, the IRS would double the amounts - 3% of withholding taxes, 40% of FICA taxes, plus the employer's contribution to FICA. Intentionally misclassifying would result in much harsher penalties. The IRS is very clear when it comes to intentional misclassification: "If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker." This is based on Internal Revenue Code section 3509. All of the employment taxes would be due, all of FICA (unless the "employee" paid some of those taxes, which offsets the cost), plus penalties in many multiples of the percentages of taxes withheld, plus potentially civil and criminal liability charges. If you don't employ anyone as an employee doing a similar role to a contractor, and have appropriate justification for using a contractor and not an employee then it might be pos- sible to get relief from federal employment tax obligations under Section 530. Consequences of Misclassification Risks of Classifying an Employee as a Contractor Consequences of Misclassification | Pg. 17

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