Independent Contractor Crackdowns and How Joseph Stack III Might Have Gotten It Wrong
When Joseph Stack III flew a plane into an Austin building housing IRS personnel, he left behind a devastated family and a rambling anti-tax and anti-government manifesto expressing, among many things, his dissatisfaction with a 1986 section of the tax code related to independently contracted software engineers. It was that section of tax code, which even its sponsor and most of the Senate called to repeal, that Stack apparently blamed for his financial problems.
David Cay Johnston of The New York Times notes in his last paragraph that Stack’s actions came a day after the administration announced that it intends to crack down on the misclassification of employees as independent contractors, implicitly connecting the two events. For Stack, who in his manifesto described what he viewed as systemic and persistent harassment by tax authorities, it would not have been difficult to assume that the crackdown was aimed at contractors instead of employers. The reality is that many employers are using the tax code to push their tax burdens onto de facto employees, and to avoid a whole host of laws that require they offer benefits and refrain from discrimination.
(Full disclosure: I worked for an employer on and off for several years that recently became notorious for having engaged in the practice of classifying employees as independent contractors. Being classified as a full-time employee when, indeed, I worked full-time for that employer would have significantly reduced my tax bills and provided me with a series of other benefits that I then lacked. The owner all but eliminated that practice several months after we amicably parted ways.)
According to Courtney Rubin at Inc. Magazine, employers who can classify their employees as independent contractors reap significant financial benefits — as evidenced by the additional $7 billion in tax revenues the administration expects to recover through its enforcement procedures.
Estimates are that companies can hold down labor costs by as much as 30 percent if they use independent contractors, because they don’t have to pay Social Security and Medicare taxes, provide vacation or sick leave, pay for workers’ compensation and unemployment compensation insurance, or worry about minimum wage or overtime provisions. (Employers also get a break on potential legal headaches – among other statutes, independent contractors aren’t protected by Title VII of the Civil Rights Act, which prohibits discrimination.)
Employers save money, and employees get screwed — particular when it comes to tax season, when independent contractors often end up paying 50 percent more in taxes than their colleagues offered “employee” classification. Independent contractors pay both their own Social Security and Medicare taxes as well as the Medicare and Social Security taxes normally paid by employers.
Governments take a hit, too, according to Steven Greenhouse at The New York Times:
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.”
Misclassified employees might be somewhat bigger fans of increased enforcement, too, unless they are part of the contingent of independent contractors who don’t report all of their income.
Rubin notes that enforcement efforts by a variety of states against this practice have been quite successful for government coffers: Microsoft paid $100 million in 2000 after an investigation; the state of Illinois collected a $328,500 penalty from one contractor last December; and 12,300 investigations in the state of New York in 2009 netted $6 million in taxes and penalties. The investigation also opens up legal possibilities for misclassified workers, who can file lawsuits against their employers to recover lost wages or other damages.
So were these enforcement efforts by the administration — designed to save workers on their taxes and force companies into compliance with labor laws — the final straw that convinced Stack to pay the IRS with his life rather than his money? If it was, either Stack was mistaken about its intent, or worried about being caught having under-reported his income. And the outcome for his family — the death of a loved one — remains the same.