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The Chicago Sun Times - Tax Loophole Hurts Misclassified Workers


Location: Chicago, IL

By Sen. Barack Obama and Sen. Dick Durbin

Every day, millions of working Americans go to their jobs, play by the rules and hope to make a decent living for themselves and their families. These workers strengthen our middle class and keep our economy going. In turn, the vast majority of American employers hold up their end of the bargain by treating their employees fairly.

But sadly, many working men and women are not being treated fairly because some businesses are using a little-known tax loophole to avoid paying their fair share. It's workers and American taxpayers who pay the price.

Here's how the Section 530 Safe Harbor in federal tax law works: By classifying a worker as an "independent contractor" instead of an "employee," an employer pays less in employment taxes and workers compensation, sometimes cutting costs by 30 percent. Misclassified workers have the employer's tax burden shifted onto them as if they were self-employed, meaning higher taxes for working-class Americans and a growing tax gap. These workers are also denied basic employee protections, such as workers compensation and overtime pay.

This week, we introduced legislation to close the loophole. The Independent Contractor Proper Classification Act of 2007 will allow the government to collect the taxes employers owe and will restore basic rights for workers. The legislation will also address the need for more enforcement of federal tax and employment laws to identify those employers in major industries that wrongly classify their workers.

The problem is real, and it's growing. A 2006 study of misclassified employees in Illinois found a $53.7 million loss of unemployment insurance taxes and a $149 million to $250 million loss of income tax. And in 2004, $97.9 million in workers compensation premiums were not paid properly. Studies in a number of other states have found similar losses.

Leaders on work-force issues in Congress have joined us in introducing this legislation, and it is supported by the AFL-CIO; Change to Win; business associations representing the interests of more than 200,000 construction employers, and the National Employment Law Project.

Illinois is among a handful of states leading the way for changes in ending employee misclassification. Last month, the Employee Classification Act became law in Illinois, and it will go a long way toward ensuring that construction companies and others properly classify their employees. But more needs to be done. Our legislation will make important changes at the federal level to complement the actions taken by our state.

Genuine independent contractors play an important role in the American work force. But, by definition, independent contractors operate their own businesses. They invest capital in their businesses, they perform services separate from the work of other employees. There are legitimate independent contractors in every industry, and their work is highly valued. Our bill ensures that both true independent contractors and true employees are treated fairly. And when billions of dollars in unpaid federal taxes come back into the system, the "tax gap" will narrow.

American workers continue to set examples for our children about the values of hard work, commitment and responsibility. We must not only protect their rights, but also enact laws that protect the value of their work.

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