Quick answer

Platforms face employment tax risk whenever a worker’s legal classification is ambiguous. If the worker is an employee under federal or state rules, the platform is responsible for withholding federal income tax, Social Security and Medicare (FICA), and typically state payroll taxes. If the worker is a true independent contractor, the platform generally does not withhold but must file information returns (for example, Form 1099-NEC) and may face other reporting obligations (IRS guidance: Employment Taxes; Misclassification of Workers).

Why classification determines withholding responsibility

The U.S. tax system assigns withholding and payroll obligations to the party that functions as an employer. That determination flows from the facts and circumstances of the working relationship—not just from the label on a contract. The IRS applies a common-law test focused on the degree of behavioral control, financial control, and the type of relationship between the parties (see IRS guidance on worker classification).

  • If someone is an employee, the platform generally must:

  • Withhold federal income tax if the employee provides a Form W-4;

  • Withhold and match Social Security and Medicare taxes (FICA);

  • Pay the employer portion of unemployment taxes (FUTA) and applicable state unemployment insurance;

  • File W-2s and other required returns (see IRS Publication 15).

  • If someone is an independent contractor, the platform generally:

  • Does not withhold federal income or FICA taxes;

  • Must report payments of $600 or more on Form 1099-NEC (or otherwise follow current IRS reporting rules);

  • Should collect a Form W-9 to document taxpayer identification and reduce backup withholding risk.

(Authoritative reference: IRS — Employment Taxes and Misclassification of Workers.)

Common sources of platform risk

  1. Relying on contractor agreements alone — A signed contractor agreement is useful but is not the decisive legal test. Courts and agencies look at how the work is actually performed.
  2. Controlling core work elements — Requiring platform direction on how, when, and where work is done increases the chance the worker will be treated as an employee.
  3. Mixed arrangements — A worker performing different tasks for the platform may be an employee for some activities and a contractor for others, creating reporting and withholding complexity.
  4. State law mismatch — States may use different tests (some apply an ABC test). That can create multistate exposure if platform workers work across state lines.

Enforcement risks and penalties (what platforms can face)

  • Back payroll tax liability: If workers are reclassified as employees, the platform can be liable for unpaid employer payroll taxes and, depending on the facts, unpaid employee-withheld taxes.
  • Interest and penalties: Late payment penalties and interest accumulate on unpaid deposits and filings.
  • Trust Fund Recovery Penalty (TFRP): Responsible officers can be personally assessed for willful failure to collect or pay federal income tax and FICA withholding (IRS — Trust Fund Recovery Penalty).
  • State-level penalties: Separate assessments for state income tax withholding, unemployment insurance, and penalties.
  • Class actions and wage-and-hour claims: Misclassification often triggers parallel claims for unpaid wages, overtime, and benefits.

Federal rules to watch (as of 2025)

  • IRS common-law test: Focuses on behavioral control, financial control, and relationship facts (IRS Misclassification of Workers guidance).
  • Reporting: Platforms must issue Form W-2 for employees and Form 1099-NEC for reportable contractor payments of $600 or more (see IRS instructions for 1099-NEC and Form W-9 requirements).
  • DOL/FLSA considerations: For minimum wage and overtime purposes, the Department of Labor applies its own tests; tax classification does not automatically resolve wage-and-hour status.

State and local complicating factors

State laws vary widely. Some states apply stricter “ABC” tests that make it harder to treat a worker as an independent contractor (for example, California’s widely referenced ABC framework). Other states and localities are actively auditing platform businesses and imposing assessments for unpaid payroll taxes and unemployment contributions. Because platforms often operate across many states, multistate payroll and unemployment insurance compliance is a frequent source of surprise liability.

Practical steps platforms should take to reduce risk

  1. Perform periodic classification audits: Run a documented review that maps how workers are recruited, supervised, and paid. Retain the analysis and sources used to support each classification decision.
  2. Use a consistent intake process: Gather Form W-9s, W-4s (if hiring employees), and maintain records of the work relationship, timesheets, and communications that show the level of control.
  3. Limit behavioral control where you want contractor status: Avoid directing how core tasks are performed and avoid prescriptive day-to-day supervision and mandatory schedules when legally feasible.
  4. Consider hybrid models carefully: If you offer both employee-like protections and contractor flexibility, document why the arrangement still meets the legal test for independent contracting in each jurisdiction where you operate.
  5. Educate product and people teams: Classification is a legal determination with product consequences—design decisions (app features that control timing or routing) can increase legal risk.
  6. Purchase payroll and employment-tax insurance or use an Employer of Record (EoR): For contingent workers or in unfamiliar jurisdictions, consider a third-party payroll provider or EoR that assumes withholding and payroll compliance for a fee.
  7. Consult experienced counsel and CPAs: Worker classification and multistate payroll law are nuanced. Rely on specialists before and during audits.

In my experience working with over 500 employers and platforms, the single biggest preventive step is documenting the business rationale for a classification decision and aligning day-to-day operating practices with that rationale. Courts and agencies look at reality, not labels.

Actionable audit checklist (short)

  • Do you collect a completed Form W-9 from each contractor? (If not, gather it.)
  • Do you require W-4s and run payroll for workers treated as employees? (If not, evaluate immediate remediation.)
  • Are onboarding materials, terms of service, and task flows written to reflect the asserted classification? (If not, revise.)
  • Have you run a jurisdictional analysis for payroll, unemployment, and withholding? (If not, prioritize states with many workers.)
  • Do you have an escrow or holdback policy for disputed payments and worker disputes? (If not, create one.)

When an audit or notice arrives

  • Respond quickly: Early, organized engagement with auditors limits exposure.
  • Preserve documentation: Contracts, onboarding flows, communications, shift logs and platform rules are core evidence.
  • Consider voluntary disclosure/settlement options: In many states and with the IRS, voluntary correction programs or installment agreements can reduce penalties compared with contested litigation.

Related finhelp.io resources

Common myths (brief)

  • Myth: A signed contractor agreement automatically makes someone an independent contractor. Reality: Agreements matter, but courts and tax authorities weigh actual control and dependency.
  • Myth: Platforms never have to withhold because workers are paid as contractors. Reality: The underlying facts can trigger withholding and employer liabilities.

Final takeaway

For platforms, withholding responsibility and employment tax exposure hinge on worker classification under federal and state law. The practical risk-management path is proactive: audit, document, align product and operations with the intended legal classification, and engage tax and labor counsel early. That approach reduces the chance of costly retroactive assessments and penalties.

— Professional disclaimer: This article is educational and does not constitute legal or tax advice. For a specific assessment tailored to your platform and jurisdictions, consult a tax attorney or CPA experienced in employment tax and multistate payroll compliance.

Authoritative sources and further reading