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States follow Uncle Sam's lead, target worker classification

For millions of workers around the country, the game has changed. Old-style jobs with benefits are very hard to come by. Even before the Great Recession, this was increasingly the case.

The reasons for this job shift are numerous and far-reaching. They include globalization, technological change and general economic trends. But the functional upshot of it all is clear: employees and contractors are working side by side in the workplace as never before.

Federal tax law, however, continues to make a fundamental distinction between employees and contractors. As we discussed in our March 15 post, the IRS has been auditing many employers, looking for misclassification of employees and payroll tax evasion.

But it isn't only the IRS that is after employers for possibly classifying employees as contractors. Sensing a source of revenue, revenue-starved states are following Uncle Sam's lead.

The IRS is concerned about employers who try to avoid payroll taxes by classifying workers as contractors rather than employees. At the state level, worker classification issues also can include unemployment taxes and workers’ compensation taxes.

From a policy standpoint, the question may be why both state and federal governments continue to cling to an economic model in which employees and contractors receive such different tax treatment. After all, we now live in an economy in which old-fashioned jobs are scarce and millions of people have become free-agent labor suppliers.

In that economy, the distinction between employees and contractors has become difficult to articulate clearly. And yet governments continue to ramp up their enforcement efforts for alleged misclassification.

Source: Bloomberg, "States Clamping Down on Workers Mislabeled as Contractors," Jim Efstathiou, Jr., Oct. 17, 2013

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