Worker Misclassification Cost Calculator
Estimate what it could cost if workers you pay as 1099 contractors are reclassified as employees: the federal employment taxes an audit would assess, state unemployment tax, and unpaid overtime under the FLSA.
Tax and wage-law rules are different. The IRS and the Department of Labor each use their own test for who is an employee, and a worker can be an employee under one and not the other. This calculator shows separate estimates for each, assuming the worker is reclassified. It doesn't decide anyone's status.
State defaults are Texas: 2.7% new-employer rate (or your industry average, if higher) on the first $9,000 per worker. Change them for your state or your assigned rate.
Estimated exposure by category
| Category | How it's calculated | Estimate |
|---|
Not included in this estimate
- Interest and IRS penalties, such as failure to deposit or accuracy-related penalties.
- State penalties, interest and any state wage-law claims.
- Benefits the workers might have been eligible for, and workers' compensation premiums.
- Attorney's fees, which the FLSA lets winning workers recover.
- Full income tax withholding and employee FICA, which apply instead of the §3509 rates if the IRS finds intentional disregard.
Rates this estimate uses
- §3509, 1099s filed: 1.5% of wages for income tax withholding and 20% of the employee's FICA share. Not filed: 3% and 40%.
- Employer FICA in full: 6.2% Social Security up to that year's wage base, plus 1.45% Medicare.
- FUTA: 0.6% of the first $7,000 per worker per year, after the standard state credit.
- FLSA: unpaid overtime premium plus an equal amount in liquidated damages.
What happens when a contractor is reclassified
If the IRS, the Department of Labor or a state agency decides that someone you paid as an independent contractor was really an employee, you can owe the employment taxes and wages you would have paid if they'd been on payroll, usually for several past years at once.
Federal employment taxes and Section 3509
Normally an employer who fails to withhold is on the hook for the full amount. Section 3509 of the Internal Revenue Code offers reduced rates when the misclassification wasn't intentional: 1.5% of wages for the income tax you should have withheld and 20% of the employee's share of FICA. If you didn't file 1099s for the workers, those rates double to 3% and 40%. Either way, you owe the employer's full share of FICA. If the IRS finds intentional disregard, the reduced rates aren't available.
Unemployment taxes
Federal unemployment tax (FUTA) and state unemployment tax apply to employees, not contractors, so both come due on reclassified workers. State reclassification often starts when a former contractor files for unemployment benefits.
Unpaid overtime under the FLSA
Contractors aren't paid overtime, but non-exempt employees must get 1.5 times their regular rate for hours over 40 in a week. Reclassified workers can recover the unpaid overtime for 2 years, or 3 if the violation was willful, plus an equal amount in liquidated damages, which doubles the back pay.
Why the checklist matters more than the math
The cheapest outcome is fixing classification before anyone audits it. The contractor-or-employee checklist shows which relationships carry the most risk, and a CPA or employment attorney can advise on reclassifying going forward, including the IRS Voluntary Classification Settlement Program.
Common questions
How far back can the IRS go?
Generally 3 years for employment tax assessments, and longer in some situations, such as when returns weren't filed. That's why the calculator defaults to 3 years.
What is the Voluntary Classification Settlement Program?
An IRS program that lets eligible businesses reclassify workers as employees going forward and pay a reduced amount for past years. Ask a CPA or tax attorney whether you qualify before an audit starts.
Does Texas use the ABC test?
No. Texas generally applies a common-law "direction and control" test for unemployment tax. Some states, including California, Massachusetts and New Jersey, use the stricter ABC test for some purposes.
Want your I-9s and contractor files checked?
A records review for small employers is in the works: what's missing, what's expiring, and what to fix first. Email to be told when it opens. Don't attach any documents.
Rules last checked: October 1, 2026. Rates, deadlines and penalty amounts change; each page names its sources.
Spot an error or a rule change?
Email admin@employercheckup.com. Rates, deadlines and penalty amounts change, and corrections are made promptly.
Talk to a professional
For a decision about a specific worker, talk to an employment attorney or CPA. These tools estimate exposure and explain the rules; they don't decide individual cases.
An estimate for planning, not legal or tax advice. Actual liability depends on the facts, the agency and negotiated outcomes. Sources: 26 U.S.C. §3509; 29 U.S.C. §§216(b) and 255; SSA wage base announcements; Texas Workforce Commission.