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Could you be personally liable for employee misclassification?

Business owners and executives often look to CPAs and other experts when they need help classifying their employees. They know the IRS and state governments have been paying more attention to employee misclassification, and they rely on your advice to stay clear of legal problems. But what happens if you make a mistake?

Under the Trust Fund Recovery Penalty (TFRP), the IRS can hold individuals personally responsible for actions that shortchange certain taxes. These include the payroll taxes a business might avoid by paying its workers as independent contractors rather than employees.

The TFRP can apply to accountants

When you think of legal action for employee misclassification, you may think of large, class action lawsuits such as those brought against Uber or Dynamex. And the news reports for these lawsuits often focus on the employers, employees and the changing employment laws. As a result, you might assume that the TFRP would similarly focus on the companies or corporations, but the TFRP is a special situation.

The TFRP is a vehicle for the IRS to recover the money that companies owe it, and if the companies can’t pay, the TFRP allows the IRS to go after anyone who meets two requirements:

  • Responsible: You don’t have to be a business owner. You don’t even have to be a part of the company. People outside of a company may be responsible if they take part in the “withholding, accounting for, or depositing or paying” of company taxes. The IRS says it may look so far as board members, insurance companies and accountants, among other possible parties.
  • Willful: To be liable under the TFRP, you need to have acted willfully. The IRS says you would have willfully misclassified employees if you did so “voluntarily, consciously, and intentionally.” An honest mistake shouldn’t cause you to run afoul of the TFRP.

Anyone facing an independent contractor audit will want to consider these two standards carefully. If the IRS can show that you were “responsible” and “willful,” it may hold you personally liable. You could need to pay some or all the unpaid taxes, along with interest.

Know your duties and your rights

As it reported on the California Senate’s new labor bill, Los Angeles Magazine noted that more than one-third of today’s Americans are classified as independent contractors. But the truth is that many of those people are likely employees under state or federal laws. The government knows this and has started taking a much closer look at employee misclassification. You’ll want to make sure you stay on top of all the applicable laws and guidelines and that you know your rights if you ever face an audit.

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Law Offices of Robert T. Leonard, APC

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