Even if your firm doesn’t qualify for the relief barring IRS re classifications…Reduced penalties apply when the worker misclassification is unintentional. The income tax withholding penalty is only 1.5% of wages, far below the normal level. And the tax rate for the employees’ share of FICA tax is 1.53%, instead of 7.65%. These percentages are doubled if your firm didn’t file 1099 forms for the workers. But there is no relief for the employers’ share of the FICA tax, which remains at 7.65%. And no interest is due on the reduced penalties for income tax withholding and the employees’ share or FICA tax. Interest is owed on the firm’s share of FICA.
Firms not under audit can voluntarily correct errors and pay a low penalty. To qualify, the business must have consistently treated the workers as contractors and given them 1099s for the past three years. A firm needn’t have a reasonable basis for the misclassification to come in and use the program. The company must agree and treat the workers as employees for future tax periods and pay a modest penalty, significantly less than the amount that would be due after an IRS examination.