Contractors versus Employees

Quick Tip:

Employers who classify workers as independent contractors must file Form 1099 reporting compensation paid to those individuals. If a worker is found to be an employee rather than a contractor, the fact that the employer filed a 1099 would reduce the damages to one year of taxes, instead of three.

If the employer has a "colorable argument" that the person was a contractor and filed a 1099, the penalty would be 25 percent of one year's taxes. Otherwise, the penalty is three years' taxes, an amount that can destroy a small business, Tuzynski said.

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