Employers have several important income tax obligations to fulfill. Not only do organizations need to pay taxes based on company revenue, but they also need to make appropriate tax contributions for their employees.
Those tax contributions add to the costs related to wages and benefits that make each new hire a costly investment. Businesses may use an assortment of different creative tactics to reduce their staffing expenses. Hiring independent contractors for projects instead of expanding an employee roster could be a cost-cutting strategy that works for some companies.
However, there is a fine line strategy between a legal contract work arrangement and an inappropriate violation of employment statutes. If workers successfully allege misclassification, their employers could face allegations of underpaying taxes.
Misclassification is a common concern
Not everyone who fills out a 1099 form instead of a W-2 when starting a new job is actually a contractor who manages their own career. Employers sometimes require that workers start their jobs as contractors while submitting to the same treatment as direct-hire employees.
Companies cannot treat workers like employees while paying them as though they are independent contractors. If workers successfully accuse a company of misclassifying them as independent contractors, the business might face a sizable wage claim. There is also reason to worry about penalties related to worker misclassification.
Unpaid payroll taxes can trigger penalties
Employers generally withhold funds from each employee’s paycheck to pay income taxes on behalf of workers. They make payments to the state and the federal government for estimated income taxes. Employers absorb partial responsibility for certain payroll taxes.
Companies match the Social Security tax payments that workers pay, with each party contributing 6.2% of the worker’s pay. They contribute toward Medicare tax obligations, federal unemployment taxes and possibly also local taxes in some cases.
When companies hire workers as direct-hire employees, the organization usually has systems in place to cover the necessary employment taxes. However, independent contractors pay the full amount of state and federal taxes on their own behalf.
The longer that misclassification persists, the larger the amount of unpaid taxes the company might potentially owe. The Internal Revenue Service (IRS) may hold the employer accountable for not just the missing contributions but also penalties and interest.
Employers who do not make all necessary tax contributions could risk major financial setbacks and scrutiny of their employment records. Responding assertively to allegations of tax underpayment or worker misclassification can help employers avoid potentially costly employment tax controversies.
