Under California Revenue and Taxation Code Section 18662, what is the penalty for misclassifying employees as independent contractors?
Correct Answer
B) 20% of wages paid plus interest
California imposes a penalty of 20% of the wages paid to misclassified workers, plus interest and additional taxes owed, making proper classification crucial.
Why This Is the Correct Answer
California imposes a penalty of 20% of wages paid to misclassified workers, plus interest and any additional taxes owed. This reflects the state's aggressive enforcement stance on worker misclassification, since employers avoid payroll taxes, unemployment insurance, and workers' comp when they misclassify employees.
Why the Other Options Are Wrong
Option A: 10% of wages paid
10% of wages paid is not the correct penalty rate under Section 18662. California sets the rate at 20%, not 10%, to provide a meaningful deterrent against misclassification.
Option C: 25% of taxes owed
25% of taxes owed confuses the base of the calculation. The penalty is calculated on wages paid — not on the taxes owed — and the rate is 20%, not 25%.
Option D: 1.5% of wages paid
1.5% of wages paid is far too low and does not correspond to any penalty provision under Section 18662. It may be confused with certain interest rates or payroll tax rates, but it is not the misclassification penalty.
Memory Technique
Think '20 = 2 decades of regret.' Misclassification costs you 20% of every wage dollar paid. The number 20 also matches the 20-letter phrase 'twenty percent of wages paid.'
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Previous Question
A contractor is bidding on a public works project in Los Angeles County with a contract value of $2,000,000. The prevailing wage determination shows carpenter wages at $45.50 per hour. What additional amount must be paid for health and welfare benefits?
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