Pub. 2 2019-2020 |Issue 2

22 E very business owner or manager at some point will have to determine whether one or more of their workers are employees or independent contractors. For a number of federal and state purposes, this is a critical distinction and raises vexing questions of fact and law. Many employers become aggressive in classifying their workers as independent contractors to avoid payroll taxes and fringe benefits, unemployment insurance, workers’ compensation expenses, minimumwage requirements and labor union issues, to name a few perceived benefits. Employment taxes constitute about 72% of the taxes the IRS collects, so it is no wonder that the IRS and other governmental agencies closely monitor and enforce worker misclassification through penalties and sanctions. Employers must withhold income and Social Security taxes from employee paychecks. Conversely, independent contractors are responsible for reporting and paying their own income and Social Security taxes. As a result, because it is more likely that employers will accurately and consistently withhold and pay taxes, the IRS is constantly on the watch for those who improperly claim independent contractor status. Employers who intentionally misclassify workers can be responsible for all unreported income and Social Security taxes of their employees for all relevant years, in addition to penalties for missed deposits and withholdings, and in egregious cases, criminal exposure. In cases where employers unintentionally misclassify workers, the employer’s A voiding Sanctions on Worker Misclassification Bruce Olsen, Attorney, Ray Quinney Nebeker