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Misclassifying workers is one of the biggest mistakes a business owner can make. It might seem cheaper to pay someone as a 1099 contractor, but if the IRS says they should be a W-2 employee, you’re looking at back taxes, penalties, and possible audits that could cripple your business.
In this episode, Mike breaks down the IRS framework for worker classification, the red flags that trigger audits, and the tax differences between employees and contractors. You’ll learn how to protect your business, avoid costly penalties, and even find tax strategies that benefit both employers and contractors.
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Chapters:
(00:16) Why Misclassification Is a Major IRS Red Flag
When workers are incorrectly classified as contractors instead of employees, the employer becomes responsible for unpaid payroll taxes, Social Security, Medicare, unemployment taxes, plus penalties and interest.
(04:01) What Triggers an IRS Audit
Unemployment claims and disgruntled workers are the two most common red flags.
(05:43) The IRS 3-Factor Test
Worker status is based on behavioral control, financial control, and the overall relationship.
(09:47) Signs of an Employee vs Contractor
Clear examples that distinguish W-2 employees from 1099 contractors.
(12:29) Tax Treatment of Each Worker Type
How payroll taxes, reporting, and deductions differ between W-2s and 1099s.
(15:22) Practical Tips for Staying Compliant
Contracts, scope of work, and how to defend your classification in an audit.
(16:31) Tax Strategies for Employers
How hiring employees changes access to tools like the Solo 401(k).
(17:08) Tax Strategies for Contractors
Turning a 1099 gig into a business with deductions, retirement plans, and S Corp elections.
Podcast Host:
Mike Jesowshek, CPA – Founder and Host of Small Business Tax Savings Podcast
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🎙 ABOUT THE PODCAST
The Small Business Tax Savings Podcast is your go-to resource for cutting-edge tax strategies to help entrepreneurs legally slash their tax bills. Hosted by Mike Jesowshek, CPA, this show breaks down complex tax topics into clear, no-fluff insights so you can keep more of your hard-earned money.
