Well, not jail exactly.
Many employers prefer to classify employees as contractors to avoid paying payroll taxes and employee benefits. If the IRS , state employment agency, or the Department of Labor (DOL) audits a taxpayer and determines that employees have been miss classified as contractors, the employer may have to pay the employees’ shares of taxes, including estimated income tax, plus the employer share of payroll taxes, interest, and penalties. In addition there is a special six year statute of limitations rather than the normal three year limit as to how far back the IRS can asses additional tax.
The IRS Voluntary Classification Settlement Program (VCSP) as described in Announcement 2012-45 offers employers the opportunity to reclassify their contractors as employees and limit exposure to additions to tax, penalties and interest. Announcement 2012-46 temporarily expands the VCSP through June 30, 2013, to employers that failed to file Forms 1099 for their contractors.
Here’s a good article about the VCSP: Get Your Worker Reclassification Relief While It Lasts
