Just as many employees are misclassified as exempt from overtime pay, when they are really non-exempt and entitled to overtime pay, many employees are also misclassified as "contract labor" or "independent contractors", rather than as employees. The trouble with that is that the employee ends up being liable to the IRS for extra payroll taxes that are normally supposed to be paid by the employer. There will also be a problem if the employee ever needs to file an unemployment claim - if the employer treated the employee as "contract labor", no wages would have been reported to the state unemployment compensation agency (in Texas, the Texas Workforce Commission) for that employee, and the ex-employee's unemployment claim will have to be disallowed. Although there is an appeal procedure for that problem, it will delay payment of unemployment benefits for at least weeks, if not months.

Sometimes, employers treat employees as "contract labor" out of ignorance of the law. Other employers do that in order to escape payroll tax liability. Whatever the reason, it is wrong. Any employee who suspects that their employer is not reporting their wages or paying payroll taxes on their wages has the right to report that to both the IRS and the TWC. The IRS collects the federal unemployment tax, the Social Security tax, and the income withholding tax. The TWC collects the state unemployment tax. An employer found to have misclassified employees as "contract labor" and to have failed to report wages and pay the payroll taxes on those wages is liable for payment of not only back taxes, but also interest and penalties.

Copyright 2000-2008. Texas Employees Association All rights reserved.