Tax loophole hurts misclassified workers
Monday, September 17, 2007
Printable FormatChicago Sun-Times
by Sen. Barack Obama and Sen. Dick Durbin
September 15, 2007
Every day, millions of working Americans go to their jobs, play by the
rules and hope to make a decent living for themselves and their
families. These workers strengthen our middle class and keep our
economy going. In turn, the vast majority of American employers hold
up their end of the bargain by treating their employees fairly.
But sadly, many working men and women are not being treated fairly
because some businesses are using a little-known tax loophole to avoid
paying their fair share. It's workers and American taxpayers who pay
the price.
Here's how the Section 530 Safe Harbor in federal tax law works: By
classifying a worker as an "independent contractor" instead of an
"employee," an employer pays less in employment taxes and workers
compensation, sometimes cutting costs by 30 percent. Misclassified
workers have the employer's tax burden shifted onto them as if they
were self-employed, meaning higher taxes for working-class Americans
and a growing tax gap. These workers are also denied basic employee
protections, such as workers compensation and overtime pay.
This week, we introduced legislation to close the loophole. The
Independent Contractor Proper Classification Act of 2007 will allow
the government to collect the taxes employers owe and will restore
basic rights for workers. The legislation will also address the need
for more enforcement of federal tax and employment laws to identify
those employers in major industries that wrongly classify their
workers.
The problem is real, and it's growing. A 2006 study of misclassified
employees in Illinois found a $53.7 million loss of unemployment
insurance taxes and a $149 million to $250 million loss of income tax.
And in 2004, $97.9 million in workers compensation premiums were not
paid properly. Studies in a number of other states have found similar
losses.
Leaders on work-force issues in Congress have joined us in introducing
this legislation, and it is supported by the AFL-CIO; Change to Win;
business associations representing the interests of more than 200,000
construction employers, and the National Employment Law Project.
Illinois is among a handful of states leading the way for changes in
ending employee misclassification. Last month, the Employee
Classification Act became law in Illinois, and it will go a long way
toward ensuring that construction companies and others properly
classify their employees. But more needs to be done. Our legislation
will make important changes at the federal level to complement the
actions taken by our state.
Genuine independent contractors play an important role in the American
work force. But, by definition, independent contractors operate their
own businesses. They invest capital in their businesses, they perform
services separate from the work of other employees. There are
legitimate independent contractors in every industry, and their work
is highly valued. Our bill ensures that both true independent
contractors and true employees are treated fairly. And when billions
of dollars in unpaid federal taxes come back into the system, the "tax
gap" will narrow.
American workers continue to set examples for our children about the
values of hard work, commitment and responsibility. We must not only
protect their rights, but also enact laws that protect the value of
their work.