Back employment taxes + interest
Retroactive employer FICA on all misclassified wages, plus liability for income tax that should have been withheld — with interest running from each original due date.
Blog · Compliance · November 2026
W-2 vs 1099: The Misclassification Mistake That Costs Employers Everything
Skipping payroll taxes by labeling workers "contractors" is one of the most audited shortcuts in employment tax. Here's how the IRS actually decides — and what getting it wrong costs.
The label on the contract doesn't decide
The IRS evaluates three buckets of evidence — behavioral control (who directs how and when the work is done), financial control (who provides tools, bears expenses, and controls profit or loss), and the relationship itself (benefits, permanence, whether the work is core to the business). A worker you schedule, supervise, and supply with equipment will usually be an employee no matter what the paperwork says. When in doubt, employers can request an official determination with Form SS-8.
What misclassification actually costs
Stacking failure penalties
Failure to file, failure to deposit, and accuracy-related penalties can compound on top of the tax itself — and responsible officers can be held personally liable under IRC § 6672.
State agencies pile on
State labor departments assess unpaid unemployment insurance, workers' comp premiums, overtime and back wages — often triggered automatically by a single worker complaint or audit.
The safe comparison:
A W-2 hire at $60,000 costs roughly $65,000–$67,000 in mandatory payroll taxes (see the full math). A misclassified worker "saves" that amount right up until an audit multiplies it. Budget honestly instead — start with our payroll software comparisons, which automate classification paperwork and filings.
Keep reading
Employer Payroll Tax Guide
FICA, FUTA, withholding, and the filing forms behind every W-2 hire.
Read the guide →First-Payroll Checklist
EIN, state registration, W-4, I-9 — everything a first-time employer needs.
Read the checklist →Official IRS Forms Directory
Form SS-8, W-9, 941, 940, and W-2/W-3 in one place.
Browse resources →