Hiring Independent Contractors FAQ
What are the risks of hiring independent contractors?
3. What are the risks of hiring independent contractors?
Despite the advantages, many businesses are wary of using ICs because they have heard about or experienced the consequences of misclassifying workers as ICs when those workers should be classified as employees. And it's true that the consequences can be economically devastating. A business must pay the IRS all back taxes owed, with interest, plus a penalty of 12% to 35% of the tax bill.
Audits by state agencies are even more common than IRS audits. State audits most frequently occur when workers classified as ICs apply for unemployment compensation after their services are terminated.
Another major disadvantage of hiring ICs is that they can sue you for negligence if they are injured on the job. This is something employees normally cannot do, because their work injuries are covered by workers' compensation insurance.
For more information, see Pros and Cons of Hiring Independent Contractors.