It’s tax season. The IRS granted many of us a small reprieve by extending the deadline to file our taxes this year to May 17. But come filing time, thousands of workers in Minnesota will find that their refund is smaller than it ought to be — or even nonexistent — because of a thorny legal issue called worker misclassification.
Our labor system divides workers into two categories: employees who are subject to an employer’s control over how they do their work and independent contractors who run their own businesses. For tax purposes, employees get a Form W-2 while independent contractors receive a 1099. Worker misclassification occurs when companies skirt the law to save money by treating a person who should be an employee as an independent contractor.
While battles over worker misclassification by companies like Uber and Lyft repeatedly make headlines, gig workers represent only the tip of the iceberg. Data from the Minnesota Legislative Auditor from 2007 (the most recent figures available) show that one in seven employers statewide misclassifies at least one employee. In construction, real estate, arts and entertainment, and trucking, misclassification is even more widespread. Last year, the owners of a large Minnesota drywall company pleaded guilty to a criminal charge after misclassifying dozens of workers, having gone so far as to register new companies under their workers’ names to enhance the façade of a contractor relationship.
When misclassification occurs, workers lose. They’re deprived of critical labor benefits and protections, from minimum wage and overtime rights, from unemployment insurance and workers’ compensation benefits, and from the right to unionize.
They also often pay more in taxes. To fund Social Security and Medicare, federal law imposes a 15.3% tax on wages that is shared by employers and employees. This is known as FICA. Independent contractors don’t split the bill with anyone, meaning a misclassified worker can face thousands of additional dollars in owed FICA taxes.
Misclassification also hurts Minnesota, as should-be employers dodge their own obligations to withhold state income taxes, to pay unemployment insurance taxes, and to buy workers’ compensation insurance.
To look at just one industry, a January 2021 report from the Midwest Economic Policy Institute found that an estimated 30,100 misclassified construction workers cost Minnesota $136 million in state tax revenues each year.
Companies gain at the expense of workers and the state. By removing employee benefits and evading tax obligations, a company that misclassifies its workforce can reduce its total labor cost by as much as 30%.
Tax season presents an ideal moment for workers to identify and challenge their own misclassification. An unexpected or unusual Form 1099 can be the biggest red flag — and is sometimes the only indicator — that misclassification has occurred.
No single fact determines the right classification for a worker, but there are some common signs that a Form 1099 is inappropriate, including if a worker had a boss or supervisor, received training, had to wear a uniform, had to work a set schedule, couldn’t turn down assignments, wasn’t allowed to work for other companies, didn’t own their own tools or vehicle, or was paid an hourly wage.
Workers don’t have to wait for action from the Capitol to protect their rights. Mid-Minnesota Legal Aid (mylegalaid.org) can provide a free legal consultation to workers statewide through its Worker Misclassification Project. Also, Prepare + Prosper (prepareandprosper.org) provides free tax-preparation services for qualifying workers with 1099 income and screens clients for possible misclassification. Minnesota state agencies can also investigate and enforce worker misclassification laws.
Tax season can be stressful enough. Don’t let misclassification ruin yours.
Eric Baudry of St. Paul is a 2019 Yale Law School graduate and staff attorney with Mid-Minnesota Legal Aid's Low Income Taxpayer Clinic in Minneapolis. His work focuses on the tax and employment law consequences of worker misclassification for low-income workers in Minnesota. Mid-Minnesota Legal Aid has offices in Minneapolis, Duluth, St. Cloud, Fertile, Mankato, and Wilmar.