$10 Billion Stolen: How Construction Tax Fraud Hurts Workers and Communities
Every year, low-road construction contractors commit $10 billion of tax fraud.[1]
This money doesn’t appear out of nowhere. It’s money that is lawfully owed to fund social services like Medicare, Social Security and infrastructure projects. Simply put, construction tax fraud doesn’t just short workers money that they are legally owed, it takes money away from services that benefit all of us.
It also allows unscrupulous, low-road contractors to cut labor costs, allowing them to appear more competitive on a playing field in which other contractors are abiding by the law. This allows them to win more projects and continue the cycle.
Unless we address the rampant tax fraud in the construction industry, low-road contractors will continue to short workers and our communities of the money we deserve.
How it Works
There are a few main ways in which low-road contractors commit tax fraud.
The key players are contractors and shell companies they collude with. These shell companies, also known as “labor brokers,” interact with the contractor to give authorities the guise that they are both conducting law-abiding business practices. Their relationship allows them to illegally move money between themselves with no oversight.[2]
Payroll Tax Fraud Instead of paying workers directly, by issuing a payroll that includes the appropriate deductions for state and federal taxes, contractors pay shell companies. Shell companies can then either skim from the top and then give this cash back to the contractor to pay workers or pay workers themselves. Since workers’ wages are now cash, these interactions are hard to detect or monitor.
Misclassification of Workers Contractors intentionally misclassify up to 2.1 million construction workers to get away with not having to pay appropriate taxes.[3] Construction workers can generally be classified as an employee or an independent contractor.
Employee: Performs work under supervision by an employer who controls the time type and location of work.
Employers withhold income tax, Social Security and Medicare from wages paid to employees.
Independent contractor: Business owner or contractor who is generally considered self-employed. They can enter usually short-term contracts to work on specific projects for an employer.
Employers do not withhold taxes for wages paid to independent contractors.
Low-road contractors chose to misclassify construction workers as independent contractors to deny workers legal rights reserved for the legal employee designation such as the right to be paid minimum wage and overtime, to access workers’ compensation insurance, and unemployment benefits.
This intentional misclassification also allows contractors to skip having to withhold income tax, Social Security and Medicare taxes from workers’ wages and skip having to pay the “employers’ share” of Social Security, Medicare and unemployment tax. Misclassifying and then paying untaxed wages to “independent contractors” means that contractors get to skip multiple taxes altogether.
According to The Century Foundation, for California, in 2021 alone, misclassification resulted in over $1 billion taxpayer costs.[4]
All of these methods work by withholding taxes from going to state and federal governments
Tax Fraud Days of Action
April 12-18, members of the United Brotherhood of Carpenters and community allies will engage in a weeklong advocacy campaign to highlight the public cost of construction tax fraud.
Every dollar of tax fraud committed by unscrupulous contractors is money that is legally owed to us, and it adds up to $10 billion a year.
It’s time to get this money back.
1StopTaxFraud.net, 2021 Data
2finCEN Notice 2023, pgs 2 & 3
3The Century Foundation Report, Up to 2.1 Million U.S. Construction Workers Are Illegally misclassified or Paid off the Books, Appendix A: Estimating the Number of Misclassified Workers by State
4For 2021, The Century Foundation Final State by State Misclassification Cost Estimates