The National Directory of Certified Public Accountants

Ask A CPA - Independent Contractors

Penalties For Treating An Employee As An Independent Contractor

Yes. The federal penalties are steep. If an owner treated the worker as an independent contractor but did not file 1099s, the IRS can levy severe penalties against you, including a 3 percent penalty for failure to withhold income tax. You would also owe the full employer portion of Social Security and Medicare taxes plus 40 percent of the employee's portion, which comes to 8.68 percent for Social Security and 2.03 percent for Medicare. Please consult with a CPA in your state to determine any state penalties which could be assessed.

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