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Be Sure You Are Classifying Properly – Employee (W-2) vs. Independent Contractor (1099)

Posted by: Karen Booher on October 20th, 2021

Misclassifying employees as independent contractors can quickly get a company into hot water. Expensive penalties can be assessed to Colorado employers who fail to property classify independent contractors from the State of Colorado, and also from the Internal Revenue Service (“IRS”).

If You Do Any of the Following with an Independent Contractor, You May Be Misclassifying

Colorado Department of Labor and Employment Investigations and Penalties

The Department of Labor, under the Fair Labor Standards Act, has well-established tests and procedures for determining an individual’s employment status.

In Colorado, if a complaint is filed and a resulting investigation finds that an employer has misclassified employees, the employer must pay all back unemployment insurance premiums owed with interest.

Additionally, if the investigation finds that the misclassification was a willful disregard of the law, the employer may be fined up to $5,000 per misclassified employee for the first misclassification, and up to $25,000 per misclassified employee for a second or subsequent misclassification.

IRS Determinations and Penalties

The IRS utilizes its own test and factors in evaluating the degree of control and the degree of independence exercised by the individual in the performance of their duties. The IRS considers three factors, taken together, in making the determination of employee status for purposes of an employer’s obligations for employment taxes accrued for a worker:

  1. The Behavioral Factor – explores whether the employer has the right to control the work performed by the worker.
  2. The Financial Factor – asks who supplies the tools and supplies needed by the worker, how the worker is paid, and whether the worker is free to offer services to others in the relevant market.
  3. The Relational Factors – examine whether the worker has a written contract or benefits provided by the employer.

Earnings of employees are subject to FICA (Social Security and Medicare) and income tax withholding. If the IRS determines that an individual has been misclassified, it may levy penalties against the employer including, but not limited to:

Better Safe Than Sorry – Utilize a Temporary Staffing Service for Payrolling

Instead of questionably classifying some workers as independent contractors, companies can always turn to Payrolling a worker they have recruited and identified on their own through a temporary staffing firm such as J. Kent Staffing.

If you are not wanting to add a W-2 employee to your headcount, the staffing agency can be the Employer of Record instead of you. The staffing agency is responsible for issuing the year-end W-2 and for all payroll tax withholdings, remitting taxes to all federal, state, and city governments, and also for providing workers’ compensation insurance for its employees.

This article does not constitute legal advice. Employers should exercise caution and seek legal counsel in categorizing employees versus independent contractors in their workforce.


  1. Colorado Department of Labor and Employment website/Misclassification
  2. JDSupra, June 16, 2021. “2021 Update – IRS Misclassifications and Costly Penalties: Independent Contractor or Employee”, written by Cayman Caven, Burr & Forman.
  3. “Q&A: managing the employment relationship in the USA”, Holland & Hart LLP. Lexology author, Rob Thomas. October 1, 2021.

Need to Have a Worker Payrolled?

Contact J. Kent Staffing to learn about our Employer of Record payrolling services.

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