Independent Contractor Compliance Blog - by Collabrus™

The State of Michigan has a significant number of workers who are being misclassified as independent contractors, hurting tax revenues and breaking state laws, according to a recent report given to Governor Jennifer Granholm.

The Interagency Task Force on Employee Misclassification said workers who are being listed wrongly by businesses as independent contractors rather than employees aren’t being covered by unemployment insurance or prevailing wage laws. In addition, taxpayers are being hurt because businesses that misclassify workers aren’t paying the taxes they should, and some misclassified workers aren’t paying the income taxes they legally owe.

Michigan is among many states (including California) that are working with the Internal Revenue Service to track down employers who are illegally misclassifying employees as a way to dodge paying unemployment and other taxes. Penalties for not paying taxes through fraud can include fines and other penalties.

“The misclassification of employees impacts employers, workers and government. Misclassified employees may not qualify for certain benefits; tax-abiding employers are placed at a competitive disadvantage, while government loses important tax revenues,” the report said.

An audit by the state looking at IRS forms Michigan businesses use to report payments to independent contractors turned up more than $23.3 million in wages that had been misclassified from 2003 through part of 2007.

The Government Accountability Office reports that employee misclassification on the federal level accounted for the underpayment of an estimated $2.72 billion in Social Security taxes, unemployment insurance taxes and income taxes in 2006.

“In Michigan, the state’s UI (Unemployment Insurance) Trust Fund has suffered significant losses due to unpaid UI taxes, while the state has lost important revenues because of employee misclassification,” the report said.

You can bet that in light of the current U.S. economic slowdown and declining tax revenues Michigan is not the only State that is doing this sort of calculation!