The U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) conducts regular audits to investigate situations where a company appears to have misclassified an employee as a contractor. The severity of the consequences for this action depends on whether it was intentional, unintentional, or fraudulent.
The ramifications for classifying employees as independent contractors can include:
A $50 fine for each unfiled W-2 form
Monetary penalties for failing to withhold income taxes (potentially 1.5% of paid wages, 40% of FICA taxes not taken from employee wages, and potentially interest for late filing)
A failure-to-pay tax penalty, which can total anywhere between 0.5% and 25% of the employer's taxes depending on how long the employer has misclassified the employee and failed to pay the appropriate taxes