U.S. Cracks Down on ‘Contractors’ as a Tax Dodge

[FarCenter]

By STEVEN GREENHOUSE -- Published: February 17, 2010

Federal and state officials, many facing record budget deficits, are starting to aggressively pursue companies that try to pass off regular employees as independent contractors.

President Obama’s 2010 budget assumes that the federal crackdown will yield at least $7 billion over 10 years. More than two dozen states also have stepped up enforcement, often by enacting stricter penalties for misclassifying workers.

Many workplace experts say a growing number of companies have maneuvered to cut costs by wrongly classifying regular employees as independent contractors, though they often are given desks, phone lines and assignments just like regular employees. Moreover, the experts say, workers have become more reluctant to challenge such practices, given the tough job market.

Companies that pass off employees as independent contractors avoid paying Social Security, Medicare and unemployment insurance taxes for those workers. Companies do not withhold income taxes from contractors’ paychecks, and several studies have indicated that, on average, misclassified independent workers do not report 30 percent of their income.

One federal study concluded that employers illegally passed off 3.4 million regular workers as contractors, while the Labor Department estimates that up to 30 percent of companies misclassify employees. Ohio’s attorney general estimates that his state has 92,500 misclassified workers, which has cost the state up to $35 million a year in unemployment insurance taxes, up to $103 million in workers’ compensation premiums and up to $223 million in income tax revenue.

“It’s a very significant problem,” said the attorney general, Richard Cordray. “Misclassification is bad for business, government and labor. Law-abiding businesses are in many ways the biggest fans of increased enforcement. Misclassifying can mean a 20 or 30 percent cost difference per worker.”

Employers deny misclassifying workers deliberately. The businesses say the lines are unclear between employee and independent contractor.

<SNIP>http://www.nytimes.com/2010/02/18/business/18workers.html?th&emc=th

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This would be the now notorious Section 1706 of the tax code, which figured prominently in the Austin Kamakaze's suicide note.

I knew a number of people who had retired early in anticipation of working as contractors who were screwed by this law.