Worker misclassification has become one of the most costly compliance mistakes Texas businesses make. With penalties reaching $1,000 per worker for intentional violations—plus criminal charges and potential jail time—the stakes have never been higher.
Between 10% and 30% of U.S. employers have misclassified at least one worker, creating a $3-4 billion annual hole in federal tax revenue. The Department of Labor’s response came on March 11, 2024, when they implemented a new Final Rule making it significantly harder to classify workers as independent contractors. Despite some enforcement adjustments in May 2025, the crackdown continues.
For Texas business owners, proper classification isn’t optional anymore. It’s survival.
The Actual Penalty Structure
Misclassification penalties escalate quickly, especially when multiple workers are involved. Here’s what Texas businesses actually face:
For unintentional misclassification:
- $50 per missing W-2
- 1.5% of wages for unwitheld income tax
- 40% of the employee’s FICA obligations (Social Security and Medicare)
- 100% of what you should have paid as the employer’s FICA share
- 0.5% monthly late-payment penalty (capped at 25% of total)
- Interest backdated to when taxes were originally due
For intentional or fraudulent misclassification:
- 20% of all wages paid
- 100% of FICA from both employee and employer sides
- Criminal fines up to $1,000 per misclassified worker
- Potential imprisonment up to one year
- Personal liability for whoever handled payroll taxes
Consider five workers earning $40,000 each over two years. Even unintentional misclassification generates over $50,000 in combined penalties, back taxes, and interest before legal fees enter the picture.
The 2024 Rule Change
On March 11, 2024, the DOL implemented stricter classification standards through a new Final Rule. This rule uses a six-factor test examining the “economic reality” of the worker relationship:
- The degree of control over how work is performed
- The worker’s opportunity for profit or loss
- Skill and initiative required
- Permanence of the relationship
- Worker investment in equipment and materials
- Whether the service is integral to the business
All six factors carry equal weight. No single factor determines classification—the DOL examines the totality of circumstances. This makes it harder for businesses to structure contractor relationships that pass scrutiny.
In May 2025, the DOL issued guidance temporarily reverting to earlier enforcement standards while they review the 2024 Rule. However, the 2024 Rule remains in effect for private litigation, and enforcement activity continues. The DOL has indicated they’ll issue new regulations, so Texas businesses should expect ongoing scrutiny regardless of which standard ultimately prevails.
The IRS Standards
The IRS doesn’t defer to DOL rules. They apply their own three-part test examining behavioral control, financial control, and the relationship itself.
Behavioral control means you’re likely dealing with an employee if you set schedules, provide specific work instructions, require on-site presence, train people in your procedures, or evaluate ongoing performance.
Financial control examines who bears business risk. When you provide tools and equipment, reimburse expenses, pay hourly or by salary, and restrict outside work, you’re eliminating the financial independence that defines true contractor status.
The relationship type matters too. Written contracts help, but the IRS looks at whether you provide benefits, how long the relationship lasts, and whether this work represents a key aspect of your business operations.
Texas-Specific Complications
Texas businesses face dual compliance requirements. Both the IRS and Texas Workforce Commission have classification standards, and they don’t always align. A worker classified correctly under IRS rules might still trigger TWC violations regarding unemployment insurance obligations—or vice versa.
TWC penalties include back unemployment insurance payments potentially reaching back several years, plus state-level fines. You can simultaneously face federal and state enforcement actions for the same workers.
Industries Under Scrutiny
Certain Texas industries draw heightened attention:
Construction companies face regular audits of subcontractors, framers, and specialty trades workers. Both DOL and TWC actively investigate construction firms.
Restaurants and hospitality businesses see frequent examination of kitchen staff, servers, and event workers—especially when multiple people perform similar roles under different classification labels.
Professional services firms using long-term contractors get attention, particularly marketing agencies, consulting firms, and technology companies where contractors work alongside employees doing comparable tasks.
Healthcare providers face scrutiny over home health aides, therapy assistants, and administrative staff classifications.
Transportation and delivery companies remain enforcement priorities, especially those providing vehicles or specific routes to drivers.
What Enforcement Looks Like
Recent major cases demonstrate the financial exposure:
Uber paid $100 million in New Jersey over 300,000 misclassified drivers. FedEx settled California claims for $228 million involving over 2,000 drivers. Holland Services owed nearly $43 million in back wages for 700 workers. Nike faces potential fines exceeding $530 million. Class action employment settlements topped $40 billion in 2024.
These represent years of accumulated liability. The pattern is clear: misclassification doesn’t stay hidden forever, and when it surfaces, the financial impact can be devastating.
Protecting Your Business
Regular workforce audits catch problems before enforcement agencies do. Quarterly classification reviews cost far less than penalty assessments and back taxes.
Document your classification decisions. The IRS provides limited protection for “reasonable basis” determinations, but only when you can prove your reasoning process. Keep records showing which factors you considered and why you reached your conclusion.
When classification is genuinely unclear, file IRS Form SS-8 for an official determination. You’ll wait at least six months, but you’ll have binding clarity and protection from future challenges.
If you’ve already misclassified workers, the Voluntary Classification Settlement Program offers relief. You can reclassify workers prospectively while paying just 10% of one year’s employment taxes—no interest or penalties. This program requires meeting specific eligibility criteria and filing Form 8952.
Use Professional Assessment Tools
Our free Texas worker classification tool evaluates your specific situation against both IRS and Texas Workforce Commission standards. The assessment takes under five minutes and examines your actual working relationships across all relevant factors.
The tool asks about behavioral control (who sets schedules, provides training, evaluates work), financial control (who provides equipment, how payment works, expense reimbursement), and relationship characteristics (written contracts, benefits, permanence, business integration).
Based on your responses, you’ll receive a risk assessment showing whether your classification likely passes IRS and TWC scrutiny—or where you have exposure requiring attention.
We built this tool based on actual IRS guidelines, TWC requirements, and decades of experience helping Texas businesses navigate classification issues. It’s designed to identify problems before they become penalties.
The Bottom Line
A $1,000 criminal penalty per worker isn’t theoretical. Neither are the civil penalties, back taxes, interest, and legal fees that accompany misclassification enforcement.
Proper classification costs little—typically just the time to properly evaluate worker relationships. Improper classification costs everything: penalties that eliminate profitable years, back taxes that drain cash reserves, legal fees that accumulate during fights with multiple agencies, and reputation damage that affects future hiring and business relationships.
The question isn’t whether you can afford to get classification right. It’s whether you can afford to get it wrong.
Since 1983, Slaton Financial Services has helped hundreds of Texas businesses navigate worker classification requirements. Our free classification tool evaluates your specific situation against both IRS and Texas Workforce Commission standards. Use our Texas worker classification tool to assess your risk in under 5 minutes.