What are the Consequences of Having Misclassified Workers?

Cathy Troyer | August 29th, 2013

My co-worker, Maribeth Wright, recently wrote a blog post titled, “Are You Properly Classifying Your Workers?”. The post explained how to determine whether a worker is an employee or an independent contractor. The article mentioned that this is a hot button issue with the IRS, as well as other government agencies.  In fact, according to The Kiplinger Tax Letter, the IRS is currently in the process of conducting 6,000 random audits, which are focusing on several payroll and fringe benefit issues – one of which is worker misclassification.

Consequences of Having Misclassified Workers

You may ask, “Why all the fuss? What would happen if the IRS would reclassify some of my workers from the “contractor” status to the “employee” status?”  Some of the consequences of a reclassification are as follows:

  • You may owe additional payroll taxes
  • If workers are reclassified, this could affect your pension and fringe benefit plans as well (if those workers should have been included in the plans, but were not)
  • Once the provisions of the Affordable Care Act are fully implemented, reclassifications could trigger employer insurance mandates

Potential penalties imposed due to reclassifications vary depending on whether the misclassification was intentional or unintentional. Companies that are not currently under audit can voluntarily correct errors and pay a lower penalty. Also, there are protections in place if a company has consistently filed Forms 1099 for the workers in question and all other similar workers.

Ohio Employment Tax Help

As you can imagine, this is a complicated area for employers. All signs indicate that the IRS will continue its efforts to identify misclassified workers. If you feel that your company may have exposure for worker reclassifications if you were to be audited and needs help, contact Rea & Associates. Our team of Ohio tax professionals can help you outline a plan of action to get into compliance with this law. Don’t get caught with unexpected tax liabilities or penalties.


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