If the IRS or another government agency determines that you have misclassified a worker as an IC, you may have to pay back taxes, fines and penalties. This is one of the greatest risks of hiring ICs. Some hiring firms try to shift this risk to the IC’s shoulders by including an indemnification clause in their IC agreements. Such a provision requires the IC to repay the hiring firm for any losses it suffers if the IC is reclassified as an employee.
This may sound attractive at first, but there are several reasons why it’s usually not a good idea to include such a clause in an IC agreement.
- You are prohibited by law from recovering from a worker any taxes and penalties the IRS assesses against you if it determines that you intentionally misclassified the worker as an IC.
- The clause is practically useless if you’re unable to locate the IC when you’re audited or the IC has no money to repay you for your losses.
- The clause makes it look as if you’re not sure whether the worker is really an IC, and it may also make an auditor doubt whether the worker is an IC.
- Many intelligent ICs will refuse to sign an agreement containing such a clause.
- The Department of Labor does not permit employers to use such clauses to shift liability for failure to pay workers time-and-a-half for overtime.
- Even if you can locate the IC and he or she has the money to repay you for your losses, you’ll still have to go to the expense and trouble of going to court to collect if the IC refuses to pay. There is a chance you’ll lose because a court might conclude that the indemnification clause goes against public policy and is unenforceable.