States Increase Scrutiny on Construction Companies That Mislabel Workers

States Increase Scrutiny on Construction Companies That Mislabel Workers

The tax treatment for contractors differs greatly from that of employees, as companies that employ the former are not required to withhold payroll taxes, make Social Security and Medicare tax payments to authorities, or provide health and retirement benefits. However, misclassification of workers comes with a number of federal and state penalties, which include fines, tax payments, interest and, in more severe cases, legal action.

Many states suffering from budget constraints have now taken a more proactive approach toward discovering and penalizing that companies that skirt their tax obligations through mislabeling workers, especially as these crimes cost states millions in potential tax revenue. For instance, Connecticut conducted a 12-month audit of its construction sector, which prompted it to reclassify 3,487 workers and uncover $68.2 million in unreported payroll, representing $1.3 million in lost payroll taxes, Bloomberg reported. Earlier in 2013, New York officials announced that an investigation found 20,200 instances of workers treated as contractors in 2012, representing more than $282.5 million in unreported wages, the news source added.

As states come to realize the prevalence of this problem across a number of industries, more are introducing or updating worker misclassification laws to curb the issue and strengthen their ability to prosecute companies. One issue that some employers find is that the guidelines that govern worker classification can be hazy, making it difficult to determine whether the employee or contractor status applies.

With more states investigating companies and the job market growing, companies that are uncertain of how to classify individuals might benefit from consulting a legal professional. Gaining a firmer understanding of state and federal rules may help lower the risk of tax issues in the future.