What happens if the IRS or another government agency decides that I should have been classifed as an employee?
Initially, it’s up to you and each hiring firm you deal with to decide whether you should be classified as an independent contractor or an employee. But this decision is subject to review by various government agencies, including the IRS and state workers’ compensation and unemployment compensation agencies. These agencies are constantly on the lookout for hiring firms that, in their view, misclassify employees as independent contractors. And with good reason: they stand to collect more money sooner if you are classified as an employee. If one or more of these agencies determine that you should have been classified as an employee, both you and the hiring firm can suffer severe — but very different — consequences. For example, if the IRS audits a hiring firm and determines that you should have been classified as an employee instead of an independent contractor, it will impose substantial assessments and penalties on the firm. At the very least, the firm will have to pay 20% of the FIC
