The Department of Labor (DOL) and Internal Revenue Service (IRS) have set their sights on companies that misclassify employees as independent contractors to avoid tax and wage responsibilities. While their targets generally have been industries such as construction, janitorial, and lodging, the two agencies have caught a large transportation company—and other corporations in their net.

Businesses large and small have an incentive to classify their workers as independent contractors since they don’t have to withhold federal, state, and Social Security (FICA) taxes, pay unemployment or workers’ compensation insurance, or offer sick leave, paid vacation, retirement benefits, and health insurance.

However, if the DOL or IRS determines that your relationships with independent contractors constitute employee status, the penalties can be harsh. You could be liable for employment tax, interest, penalties, and even prosecution. If companies misclassify their workers, they risk getting audited by one or more federal and state government agencies. The IRS, for example, might require the company to pay all back withholding taxes plus interest in addition to pressing criminal charges against company officials.

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