Back taxes can total:

15.30 % Social Security Tax (on income up to the cap, plus 2.9 % of income above that cap)
20.00 % Federal Income Tax
+6.20 % Unemployment Insurance
41.50 % of the contractor's pay

Auditors can go back three years. Fortunately, for those companies the IRS feels did not intentionally ignore the law, the fines are less (Section 3509 of the Internal Revenue Code). Be advised that any relief of tax liability provided by the IRS - such as Section 530 of the Revenue Act of 1978 - is of limited applicability in the staffing industry. This section, also referred to as the "Safe Harbor Act," was amended in 1986 to not relieve engineers, designers, drafters, computer programmers, systems analysts, or other similar skills or lines of work of tax liability.

Additional fines can be imposed by the IRS depending on the situation. The violations and associated fines are:

Violation Potential Fine
Failure to file W-2 or 1099 form The minimum fine is $50 for each form that you failed to file. The maximum fine is $250,000 per business or $100,000 for small businesses.
Failure to file quarterly returns 25 percent of the unpaid tax liability.
Failure to pay taxes 0.5 percent of the unpaid tax liability for each month up to 25 percent.
Failure to get Social Security number $50 for each Social Security number you didn't get.

There are also significant fines if the IRS believes you committed fraud or were negligent, plus fines for many other situations. Contact the IRS if you want further information. In addition, any responsible person (including corporate officers and employees or members or employees of a partnership) with authority over the financial affairs of the business who willfully fails to collect and pay taxes may be held personally liable for the total amount of the uncollected tax under the "100 percent" provisions of the Internal Revenue Code (I.R.C.). Another point to keep in mind is that independent contractors who wrongfully benefited as a result of being paid on a 1099 are virtually free from penalties. The IRS may audit them and require them to eliminate any business deductions they took; however, the main focus is on the entity with the deepest pockets, in most cases, the company.

Furthermore, if a company classifies workers to avoid paying overtime according to the FLSA, the company can be subject penalties, from the payment of unpaid overtime premiums to liquidated damages, fines of $10,000, and six months imprisonment for willful violations. Unpaid overtime premiums alone may represent substantial monetary liability depending upon the size of the work force and the length of time that the company has failed to pay appropriate overtime.

Contractor Payrolling | IRS 20-point Checklist | 1099, W-2 and the IRS | A True Contractor | Does Incorporation Matter? | What Interests the IRS? | Fines and Ramifications | Common Myths

NOTICE: Accounting Partners has provided the content of this page for general informational purposes only. You should not substitute this information for personal consultation with a qualified professional in the field, nor should you rely upon this information in taking any action. No attorney-client relationship will be created through your use of this Web site, nor from any response from or conversation with Accounting Partners' Legal Department.
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