- A 1099 contractor which you legitimately retained as a contractor
may claim, sue and win: unemployment insurance, disability payments,
workers compensation, employee benefits, stock options, profit sharing
and retirement benefits by claiming they were actually an
employee
- The contractor will claim you misclassified them as contractors when
they were true employees and you did so to avoid paying the applicable
taxes and benefits
- One or more government agency will then conduct audits seeking to
recover uncollected fees, taxes and penalties (which can be
substantial)
- If the IRS finds you have misclassified employees, as independent
contractors you may be responsible for paying all withholding taxes,
plus interest, even if the workers already paid the taxes themselves.
In addition, the IRS may impose financial penalties on the company
totaling thousands of dollars. Adding insult to injury, the EDD and
other government agencies may impose additional penalties to those
levied by the IRS
- You are at the greatest risk of being audited by the Internal
Revenue Service or the Employment Development Department but other
agencies may become involved such as the Workers Compensation Appeals
board, Immigration and Naturalization Service, U. S. Department of
Labor and the State Labor Commissioner
- The IRS has distilled the findings of hundreds of rulings and court
cases into a list of twenty common law factors that can be used on a
case-by-case basis to determine whether a contract worker is actually
an employee. The IRS list of twenty common law factors is more
comprehensive than the other agencies' lists, and is the most
frequently consulted by hiring companies.
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