Fighting 1099 Misclassification and Tax Fraud
The Northeast Regional Council of Carpenters is dedicated to shining a light on the issue of 1099 misclassification and combating tax fraud wherever it occurs. Our leaders and staff have been active in educating elected officials in state and local government on the injustices of tax fraud. Our goal is to create a level playing field for law-abiding contractors and to prevent law breakers from robbing communities of valuable tax revenue.
What is 1099 Misclassification?
Misclassification is when construction contractors call their workers independent contractors to avoid paying taxes, insurance costs and payroll deductions. This exploitation hurts workers, honest and law-abiding businesses and the U.S. taxpayer, as the employer avoids paying any Social Security or Medicare, workers compensation, unemployment insurance or overtime and cheats the government out of tax revenue.
Reasons that Contractors Misclassify Workers
Misclassification occurs in all 50 states in residential, commercial, and public construction projects of all sizes. 1099 fraud is construction’s “dirty secret” and honest contractors haven’t been able to stop it.
Illegal Profits: The 1099 scheme lets companies avoid normal payrolls, so they don’t pay Social Security or Medicare, workers’ comp or unemployment insurance, or overtime—all of which are required by law.
Rigged Bids: These criminals illegally save 30 percent or more on labor costs—and win more contracts because they can underbid honest, law-abiding, tax-paying competitors.
No Taxes, No Records: These companies say they will send individuals their 1099 forms, but most don’t even do that.
What We are Doing To Combat the Issue
The NRCC along with other organizations commissioned a Stockton University study to define how prevalent and damaging 1099 misclassification is to New Jersey’s economy. The Underground Construction Economy in New Jersey study concluded that some construction companies in the State are misclassifying construction workers, paying them cash under the table and not paying Social Security, Medicare, unemployment insurance or workers compensation. These companies are not paying worker benefits and cheating the Federal and State government out of millions of dollars in tax revenue per year.
Stockton found that New Jersey’s underground construction economy is estimated to range between $528 million and $1.2 billion and involves 35,000 construction workers who operate off-the-books or as misclassified independent contractors. Stockton believes that between $284 million and $528 million are paid each year in underground wages. Lost state income taxes not being paid to the state are estimated to be nearly $11 million in off-the-books employment and nearly $9 million from employment of misclassified workers. An estimated $3.1 million to $6.7 million in unemployment insurance also goes unpaid by unscrupulous construction contractors.
We’ve been sharing this study with organizations throughout our industry, talking to the news media, like the March 2, 2017 NJBIZ article: Building in the shadows: NJ Trade Unions Hope to Reinvigorate Discussion on Regulating Underground Construction Economy and plan to launch a website Unscrupulous Contractors in the near future to highlight contractors that aren’t abiding by the law.
On May 3, 2018, New Jersey Governor Phil Murphy signed an Executive Order that establishes an Employee Misclassification Task Force. Check out news coverage from the signing of his Executive Order at the Northeast Regional Council of Carpenters Apprentice Training Center in Edison, New Jersey here.