Employee Misclassification in Payroll Processing

$100,000-$500,000+ in back payroll taxes + FICA contributions + state unemployment insurance + penalties (20-40% on wages); attorney fees for DOL investigation; potential client contract penalties if misclassification transfers liability; reputational damage in professional services market • $100,000–$250,000 (back payroll taxes + 20%–40% penalties + interest on 4–8 misclassified staff earning $35k–$75k annually, spanning 2–3 years) • $135,900 cumulative employment tax liability over 3 years (for $100k annual wages); plus 20% negligence penalty ($27,180), 1.5% wage penalty, 40% FICA penalties, interest accrual, $50 per unfiled W-2; potential lawsuit costs from employees claiming unpaid overtime and benefits

Ad-hoc Slack messages between CEO and accountant about worker status; spreadsheet in shared Google Drive with no version control; contractors classified based on founder's verbal instructions • Bookkeeper follows procurement/contracting rules only (procurement code) and ignores IRS classification; minimal cross-check with payroll tax requirements; reliance on HR/Procurement approval as proxy for tax compliance • Bookkeeper maintains informal list of contractor vs. employee payments in QuickBooks; relies on individual's verbal instructions; ad-hoc classification based on payment method (1099 vs. check); annual estimates