I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS and Florida Department of Revenue. See this post about the absolute worst business mistake. But what is the second worst mistake you can make that often leads to the worst mistake? The answer is misclassifying employees as contractors. If the IRS determines that you have done this evil deed, the resulting taxes and penalties can easily put you out of business.
What makes it so expensive? The IRS is going to calculate the taxes due for each if the three open tax years by taking the total wages for each year and multiplying them by 13.71% to cover the social security taxes and income taxes that should have been withheld. To this result they will add the failure-to-pay penalty that maxes out at 25% of the unpaid tax. Finally, there is a $50 penalty for each W-2 that should have been filed.
This works out to a little over $17,000 for each $100,000 of misclassified wages. Typically, most business will be on the hook for the last three years, so you can multiply that $17,000 by three to get an idea of your level of risk. It’s not hard to see why any small business that gets caught with more than a few misclassified employees will be effectively out of business.
Some of my clients have decided that this risk is a business necessity because their competitors are misclassifying their employees. Even if it is true that their competitors are cheating, and you don’t really know for certain, the risk is still way too high. Sooner or later one of the ex-employees is going to get nailed for not paying their taxes and they will try to reduce their liability by turning in their employer.
Bottom line – when in doubt as to employee- contractor status, treat them as an employee.
If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@backoffice2.net.
Gainesville, FL
Cell (352) 317-5692
Office (352) 376-9401
Fax (352) 376-9440
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