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What tax issues arise from misclassifying workers as contractors?

On Behalf of | Jan 21, 2025 | Tax Controversies |

Misclassifying employees as independent contractors can cause serious tax problems for businesses. In New York, strict rules determine whether a worker is an employee or a contractor. Employers who fail to classify workers correctly risk financial penalties and other consequences.

Increased tax liability

Employers must pay certain taxes for employees, including Social Security, Medicare, and unemployment insurance taxes. Misclassifying workers as contractors means these taxes go unpaid, creating tax liability if the mistake is uncovered. Businesses may also face back taxes, interest, and penalties.

Penalties under New York law

Employers can also face harsh penalties for worker misclassification. They may owe fines for unpaid payroll taxes and violations of wage and hour laws. The New York State Department of Labor can investigate and take action against businesses that fail to comply with worker classification rules.

Impact on workers’ rights

Misclassification affects workers, too. Employees are entitled to benefits like overtime pay, health insurance, and workers’ compensation. Contractors do not have these protections. If misclassification occurs, employees can file complaints, leading to legal disputes and further costs for the employer.

How to determine worker status

The law uses specific tests to determine if someone is an employee or contractor. Factors include how much control the employer has over the worker and whether the worker operates independently. Employers should carefully review these criteria before classifying workers to avoid mistakes.

Correctly classifying workers is important for avoiding costly penalties and safeguarding business operations. Employers who adhere to the law create a stable foundation for their workforce while preventing unnecessary financial and legal risks.