Misclassified Employees & Potential Penalties

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As defined in Revenue Code Section 3509, misclassifying a worker as an independent contractor could result in being held liable for multiple items:

• Employee's federal income tax
• Employee Social Security tax and Medicare tax
• Employer and employee Social Security tax and Medicare tax
• Federal unemployment tax
• Possible penalty and interest

The IRS provides relief for employers who misclassified employees in error under IRC §3509. The Classification Settlement Program allows IRS examiners to offer employers with worker classification issues a settlement using a closing agreement that includes reduced rates for the employee's share of FICA taxes and the FITW (Federal Income Tax Withholding) that would have been withheld if properly classified as an employee. The employer making the error is still responsible for the full amount of their share of the FICA taxes and FUTA (Federal Unemployment Tax Act).


If the company has a reasonable basis for not treating workers as employees they must be able to show one of the following:

• Judicial Precedent Safe Haven
• Past Audit Safe Haven
• Industry Practice Safe Haven
• Other Reasonable Basis

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