Unscrupulous employers who try to save a few bucks         

By Jim Youngquist

[JAN. 31, 2007]  Well, it's tax day for businesses in the United States. Bookkeepers, accountants and managers are hurriedly preparing their complex quarterly returns, 940 reports, 941 reports, returns and payments for SUTA and FUTA, 1099s, and most importantly, W-2s. These reports all have to do with payroll, an essential commodity in our economic system.

When my wife and I went into business some 30 years ago, we determined that we wanted to provide jobs for other people. In fact, some business people say that you are not really a business person until you hire people and pay wages to grow your business: rather you are only providing yourself with a job.

Paying employees a respectable wage, allowing them to actively and creatively contribute to your business, is crucial to the growth of your business. But some so-called employers hire people and pay them under the table without withholding wage deductions for income taxes and Social Security, without paying into the state unemployment tax or the federal unemployment tax pool, and without paying workers' comp insurance on employees, in order to save money and not have the burden of all that paperwork.

There are two types of these unscrupulous employers: those who are blatantly disobeying the law and not reporting any wages paid to the government, thus contributing to the underground economy, and those who are reporting a lie to the government by issuing their employees a 1099 report on Jan. 31, claiming that their employees are "independent contractors."

The former group of employers, those who pay under the table without any payroll withholding, should be avoided at all costs. As surely as they steal the government's money, they will also steal your money as well. If you become injured while in their employ, you will be responsible for your own medical expenses instead of filing a workers' comp claim.

The latter, those employers who attempt to report that their employees are actually businesses providing contract labor, are the subject of this essay. They are breaking the law, and their greed is contributing to poverty in this country.

Employers are responsible for reporting wages to the government; withholding income taxes, employees' Social Security and Medicare contributions; paying their own equal share of Social Security and Medicare contributions; and paying for workers' comp insurance to protect the worker while he or she is on the job and for federal and state unemployment. The expenses of employing people are much greater than merely paying them their daily wage. The employer's share of contributing to the welfare of the individual employee and the welfare of everyone employed is about 17 percent to 25 percent more than base wages. The cost of employing people is great, and the task of completing the appropriate paperwork is huge.

Those employers who don't withhold payroll deductions for their employees and don't properly report and submit withholdings and contributions to the government are playing a short-term game that you and they won't get caught pocketing that extra money. If they issue you a 1099 instead of a W-2 on Jan. 31, they are making you responsible for your own tax withholding, and your own Social Security and Medicare contributions, which will equal or exceed 15 percent of your wages. On or before April 15, you, the employee, will be receiving a large tax bill rather than a probable tax refund, because you have been cheated. What may have seemed attractive at the onset will become an incredible burden in the end.

IRS Publication 1779 defines an independent contractor as one who is in business for themselves. Doing business with an independent contractor means that you tell them what you want accomplished but do not detail or control the steps to the goal or provide the equipment or budget or training for accomplishing the task. An independent contractor risks making a profit or suffering a loss if they miscalculate the business deal.

An employee is one who is accountable for their time to the employer, for showing up at a particular arranged time, is provided with the direct supervision of the employer, is instructed on how to do each procedure, and is supplied with the necessary equipment and supplies to accomplish the task or is reimbursed for those expenses. The employer directs the whole operation and is the ultimate responsible party. You, the employee, are paid an arranged wage and work without the risk of loss or the burden of failure.

Employees who work for wages paid under the table or as "independent contractors" usually spend all their wages as they go rather than self-reporting and self-withholding and owe their entire tax burden with no money left over at the end of the year to pay their taxes. This causes them to get further and further in debt.

If you are a business that subcontracts to other businesses, you should be aware that if your subcontractor is failing to pay workers' comp on their employees, your business may become liable for those work-comp payments.

If you are an employer who is cheating your employees in this manner, be assured that this practice will catch up with you one day. IRS Publication 15-A says that when caught, these employers will be responsible for paying the entirety of their employees' withholding and contributions out of their own pocket, plus penalties and interest, and you might go to jail. Consult with a bookkeeping firm or an accountant to learn how you can become compliant, law-abiding and positively contributing to the lives of those you employ.

Do the right thing.

[Jim Youngquist]

---