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Last time, we talked about employee misclassification, and how detrimental it is to both the economy and the industries within which it’s happening. Not only does misclassifying a worker as an employee or independent contractor ultimately exploit the worker from receiving the benefits to which he or she is entitled, it causes a financial drain on the entire economic system.

Employee or Independent Contractor?

Although employers seem to think that not distinguishing between an employee or independent contractor is a way to cut corners and save themselves money, what they may not realize is that the money they’re not paying winds up seriously hurting everyone else by preventing their tax dollars from funding various government initiatives.

Employee Misclassification

According to the most recent national audits, employee misclassification is a growing epidemic. In 1984, the IRS reported that there were 3.4 million misclassified workers, 15% of the workforce, which resulted in a revenue loss of $1.6 billion. In 2000, the Department of Labor studied nine states and found that up to one-third of employers were misclassifying their employees.

As the construction industry continues to grow, unregulated workplaces and low wages become an increasing problem. This is especially apparent in Tennessee, where the US Labor Department found that 9,098 construction workers where misclassified in 2006, which resulted in unemployment insurance payment losses of up to $14.9 million. Additionally, the misclassification resulted in as much as $91.6 million in unpaid workers compensation insurance premiums.

In 2007, there was a federal income tax loss as high as $73.4 million due to employee or independent contractor misclassification in the construction industry, and Social Security and Medicare losses from $7.8 million to $42 million.

Not only do workers who are misclassified miss out on benefits to which they should be entitled as employees, they also wind up responsible for paying different taxes and fees that their employers should be paying. These workers often don’t pay the taxes and fees that they’re supposed to, which becomes a fraud issue.

Employers who pay their workers in cash to avoid having to report the income to the IRS, also known as “off-the-books,” also create significant fraud issues, because all of that unaccounted income creates an incredible tax revenue loss.

Next time we’ll look into wages and subcontractors with regard to the misclassification of employee or independent contractor.

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