What kind of fraud is misclassification of employees?

An employer who fails to properly classify employees and instead either pays them under the table or issues 1099MISC is:

1. Not paying the employer portion of Social Security and Medicare Tax

2. Not paying into the federal and state unemployment taxes

3. Not covering the employees for workers compensation

4. Not remitting required federal and state withholding for the employees

So this amounts to federal and state tax evasion on several levels, as well as violates federal and state labor laws.

Any deliberate attempt to underreport or underpay tax due is fraud. The amount is irrelevant although it may not be worth the pursuit. If IRS picks up on it, it would, at a minimum, find itself liable for the employer portion of Social Security and Medicare taxes plus additional federal unemployment tax. If it couldn't prove that the employee paid their share of the taxes, they would be liable for that too. Plus penalites.

It IS tax fraud and the SS-8 submittal starts the process. An employer who misclassifies employees as "contractors" does so to evade paying the EMPLOYER portion of payroll taxes - along with the expense of providing workers comp insurance and other indirect benefits. It's more than just "who pays the employee portion of the payroll taxes."

Let's see, failure to withhold.

Failure to pay FUTA.

Failure to pay for worker's comp.

When caught (either by payroll audit or a bunch of employees filing the SS-8), they will owe the money they should have withheld PLUS a 100% penalty. This is enough to put many companies out of business.

if IRS determines you have misclassified, they will require the employer to pay his portion of the FICA Taxes and very likely this will trickle down to the state as well, so this could cost the employer considerable amount

since you still were responsible for your share of the FICA you might petition to get the other portion you paid(the employer's share) refunded to you

but rarely is the employer prosecuted for his mistake in the misclassification

This is the asker - Oops, I meant "who pays the *employer* portion of payroll taxes".

It is tax evasion actually.