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Penalties for employee misclassification: new Texas law coming

We've been following the issue of employee classification for quite some time in this blog. In our June 25 post, we wrote about IRS criminal investigations for possible employment tax fraud in cases of suspected misclassification. The IRS has also been offering a program to encourage employers to voluntarily reclassify workers as employees rather than contractors or some other status.

But it isn't only at the federal level that employee classification is an ongoing issue. Here in Texas, a new law that takes effect next year aims to impose greater consequences on employers who wrongfully misclassify employees as self-employed or as independent contractors in order to avoid payroll taxes.


The issue is of particular concern in the construction industry. According to one study, about 40 percent of construction workers in Texas are not classified properly. The study was done in 2012 by University of Texas faculty in conjunction with the Workers Defense Project.

Naturally the state is concerned about lost tax revenue that would otherwise be received from employment taxes on these workers. In particular, the 2012 study estimated that Texas missed out on at least $54.5 million in unemployment insurance tax as a result of misclassification.

If the researchers are correct, the federal government lost out on millions of dollars as well. This is because employers are not required to pay payroll taxes on workers who are not classified as employees.

So what does the new Texas law do? The implementation of the law is not yet fully clear.  At present, the Texas Workforce Commission is conducting a review of how the law will affect its tax audit procedures.

But when the law - House Bill 2015 - takes effect on January 1, there are likely to be penalties for construction companies that misclassify workers. The amount could be $200 per worker.

Source: CPA Practice Advisor, "New Texas law focuses on construction payroll fraud," Yamil Berard (Fort Worth Star-Telegram), August 1, 2013

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