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More on misclassification of workers: state unemployment taxes

We've been following the issue of worker classification closely in this blog. As we discussed in our August 22 post, a new law will take effect in Texas next year regarding the consequences to employers for the wrongful misclassification of employees. 

Indeed, both state and federal authorities have turned increasing attention to the question of proper classification. Revenue authorities are concerned that employers may classify employees as independent contractors or consultants in order to avoid payroll taxes, unemployment taxes and other obligations. 

In this post we will look at recent worker classification developments in Massachusetts that help provide context for the issue in the Forth Worth area and elsewhere in Texas.

In Massachusetts, state officials recently announced that the state has recovered millions of dollars in taxes and penalties related to the misclassification of workers.

Over an 18-month period from mid-2011 to the end of 2012, the state recouped about $21.4 million in tax revenue lost to misclassification. The bulk of the money, about $17 million, came from unpaid unemployment taxes.

It makes sense, at the state level, that unemployment taxes would be the largest sum. This is because the Social Security and Medicare payments that are part of payroll taxes are a federal, not state, responsibility.

Massachusetts officials sought to tackle the issue of misclassification through a task force that also looked at other types of employer fraud, particularly those that occur in the underground economy. In the underground economy, many transactions are not reported -- and therefore not taxed.

It is simply not accurate, however, to completely lump misclassification issues in with issues of fraud. After all, employee classification is a complicated subject. The rules for determining who is an employee are based on many different factors. Many employers struggle to follow the rules, but find it difficult to do so.

Source: Worcester Business Journal, "State Says it Recovered $21M In Employer Fraud, Worker Misclassification," Rick Saia, September 5, 2013

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