IRVINE, Calif., Feb. 12, 2025 /PRNewswire/ -- The modern workforce includes two primary categories of workers: employees and independent contractors. Both provide services in exchange for compensation, but the legal and tax implications could not be more different. Employers have drastically different responsibilities depending on which classification applies—particularly regarding employment and withholding taxes (often referred to as "trust fund taxes"). In light of California's evolving legal framework—along with the possibility of significant federal and state penalties for worker misclassification—it is imperative for businesses to understand how these classification standards have narrowed. A single Department of Labor or California Unemployment claim from a former independent contractor can easily trigger a high-risk state or federal employment tax audit, including an eggshell or reverse-eggshell audit, unearthing serious liabilities for back taxes, civil and criminal tax penalties, and interest.
Why Worker Classification Matters
Calling someone an independent contractor is not enough to make them one in a legal sense. If the government determines a worker was misclassified, the business may face:
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