Misclassifying your employees as independent contractors can seem pretty tempting. You’ll pay less in federal and state taxes and for your workers’ compensation insurance. In the short term it might seem like a great cost-saver and way to increase your bottom line. But in the end, it’s really a terrible idea. Here’s why you shouldn’t misclassify employees -- no matter how tempted you might be.
How Misclassification of Employees Occurs
The main misclassification of employees occurs between designating them as independent contractors instead of employees. Independent contractors are reported to the IRS on a Form 1099. They’re in charge of their own schedule and who they work for, besides your company. Unlike a regular employee, they’re only paid for the actual work they do, usually in a specified amount of time.
Employees are much different from independent contractors. You have much more control over your employees. You determine the kind of work they do and when and where they do it. They’re subject to your requirements about hours worked and instructions you provide for how to complete their job. Employees are often evaluated on job performance and other parameters and are trained for the job they’ve been hired to do. They also receive a guaranteed amount of wages for a set amount of time.
What Happens When You Misclassify Employees
An honest mistake about how to classify an employee or two can happen to any business owner. Willfully misclassifying one or many employees will not lead anywhere good for you or your company.
Once you’re caught - and you’ll be caught eventually - you’ll owe both back taxes and fines. Fines can equal up to one hundred percent of your total tax bill. You’ll be liable for state and federal income tax not withheld, all Social Security taxes that didn’t get withheld, plus unemployment tax insurance of up to 6.2 percent. Depending on the fine you receive, it may be one lump sum or a specific fine for every single misclassification.
Your workers comp insurance is no different. Any savings you saw from lower premiums will be immediately wiped out from the fines. Your premiums will increase to the correct level, and you’ll likely have to pay the amount you should have been paying during the misclassification. And if an incorrectly classified employee is hurt during this time and decides to sue, you’ll be paying legal fees, fines, and settlements.
Does that sound like it’s worth it? Much better to classify and cover your employees correctly. One accident or audit could ruin you financially once all the fees are assessed.
If you’re not sure whether you’ve classified your employees - even a single one - correctly or not, speak with your accountant or tax attorney. Get any problems fixed immediately. When you’d like to look for better ways to save on your workers’ comp insurance, contact us at Charlotte Insurance. We can get you a quote for a new policy and help you find ways to reduce accidents and improve safety. There’s a better and legal way to save money than misclassification.