Coordinated Counsel
Employment Contracts
Transcript
BARRY: We have new number 11, which we added last time. It’s bold. We both get excited about it. It’s an interesting issue, and it’s the subject matter of a lot of games and how the law changes and games get played. So number 11 is characterizing or mischaracterizing employees slash 1099s — independent contractors. What’s the big deal? Why can’t we do that?
CHAD: A lot of business owners, when they’re starting out, love to categorize people as 1099s. Independent contractors. Because they don’t have to pay payroll tax on them. No Social Security, no Medicare. We find that’s why business owners do it a lot of times. But the IRS will eventually realize that if someone should be characterized as a W-2 employee and you’re not doing it, they’re going to come back and come after you. And financially, there could be a lot of unnecessary penalties and taxes you’ll owe down the road that are a lot more severe than if you had just done things appropriately from the get-go.
The rules relate to how much the employee works, and there’s a lot– I’m sure you can speak to the legal requirements in terms of the classification distinction between the two. But financially speaking, it could really harm the business down the road in terms of depleting cash flow or other assets of the business to make up for their error.
BARRY: Yeah. I think I agree with everything you just said. You can’t just choose what’s convenient. To go back, I think we mentioned in our last video the law changed with the Affordable Care Act that businesses were required to carry insurance if they were of a certain size. I believe it was 50 employees or more.
And so people started– I guess people around that threshold, give or take 10, started to recharacterize their people so they wouldn’t have to carry insurance because it’s a huge financial commitment. Aside from general gamesmanship that goes on just to minimize taxes, that was a big driver that put it on the radar. We could probably do a whole session on this too, and probably should.
The IRS looks at it from a substantive point of view. They do not look at what you call yourself or what you write in the contract that you are.
CHAD: It’s a lot like first-year grad school when all they talked about was substance over form. So this is bringing back lovely memories.
BARRY: What I love about the law — what nobody else loves — is that it’s substantive. It’s about the essence of things, not so much what’s on the surface. So when you look at a person and their relationship with a company, you can put aside the labels all day. What do they do? How do they do it? When do they do it? Where do they do it? Under whose direction, control, equipment? There’s so many different levels of analysis that goes into it. And of course, if it gets audited, it’s like a colonoscopy and it’s going to be unpleasant.
CHAD: Everyone knows how fun those are.
BARRY: I will not speak on that one. I will not speak on that one. But the bottom line is that, yes, at the end of the day, there is savings if you’re a contractor in terms of payroll taxes. I think, just round numbers, it’s 7.5 percent for employee and employer. So 15 percent is the difference. There’s penalties, interest, and it’s a crime–
CHAD: Payroll tax is and interesting topic right now with the executive order that’s currently being proposed and what that may do to businesses who don’t accounting for things correctly, and what that may do to people who think they’re getting bigger paychecks now who will likely have to make up for it next year.
Hidden Costs of Worker Misclassification: Why “Flexible” Hiring Can Create Rigid Financial Problems Later
By: Barry E. Haimo, Esq.
January 22, 2026
Many small businesses start with lean budgets, big ambitions, and a handful of people wearing multiple hats. In that early stage, it can be tempting to classify everyone as an independent contractor.
It feels flexible. It feels simple. And, as many business owners quietly admit, it’s cheaper — no payroll taxes, no benefits, no complex onboarding.
But the short-term convenience can create long-term exposure that jeopardizes both cash flow and company stability. Misclassification isn’t just a paperwork issue; it taps into some of the most fundamental principles of tax law, employment law, and financial responsibility. And as recent enforcement trends show, regulators are increasingly focused on businesses that blur the lines.
Misclassification Isn’t About What You Call Someone — It’s About What They Are
A recurring theme in employment and tax law is “substance over form.” Whether you label someone a contractor or an employee is irrelevant if the working relationship tells a different story. Regulators look at behavioral control, financial control, and the nature of the relationship. Who supplies the equipment? Who sets the schedule? Who decides how work is done?
If the employer controls the conditions of work, the law tends to treat the worker as an employee regardless of what the contract says.
This is important because many business owners assume that having a signed independent contractor agreement is enough. It isn’t. The IRS and state agencies look right past the paperwork and into the reality of the arrangement.
Why Enforcement Is Increasing (And Why Businesses Should Pay Attention)
Worker classification has always been on the IRS’s radar, but several policy changes over the last decade have pushed the issue front and center. The Affordable Care Act prompted many mid-sized businesses to reclassify workers to avoid health insurance obligations. This raised red flags and taught the IRS exactly where misclassification tends to cluster.
More recently, evolving executive orders and shifting federal priorities have renewed scrutiny of payroll tax compliance. Payroll taxes are a major revenue stream for the government, and misclassification — intentional or not — creates significant revenue gaps. When the IRS investigates, it’s not just back taxes that come due. Penalties, interest, and in extreme cases, criminal exposure can follow.
And the fallout isn’t limited to government interactions. Misclassification issues often surface during:
- Company sales and mergers
- VC or private equity due diligence
- Employee disputes or wage claims
- Audits triggered by unemployment filings
One misclassified worker can create a chain reaction of financial and legal complications.
The Ripple Effect on Cash Flow and Future Growth
A business that saves money today by misclassifying workers often pays far more later. Reclassifying a worker retroactively means not only repaying the employer’s share of payroll taxes, but also the employee’s share — because you cannot legally collect that portion after the fact. Add penalties and interest, and the liability multiplies quickly.
For a growing business, this can drain reserves, slow expansion, or derail investor conversations.
A Better Strategy: Build Compliance into Growth Plans
In contrast, businesses that treat workforce structure as part of their strategic planning — not as an afterthought — avoid painful surprises. This means consulting legal and financial advisors early, documenting roles carefully, and revisiting classifications as roles evolve. Compliance shouldn’t be seen as a hurdle; it’s a safeguard that protects the business from future disruption.
Misclassification may seem like a shortcut, but in reality, it’s a detour that often leads back to the same destination — only with a much higher toll.
If businesses want flexible, scalable teams, they must build that flexibility the right way: through proper structures, not wishful labels.
Want to make sure your workers are classified correctly? Get in touch.
