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Contract to Cheat: How the reporting was done

Posted Friday, Sep. 05, 2014  comments  Print Reprints

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The News & Observer first examined companies illegally treating employees as independent contractors in “The Ghost Workers,” a series in 2012.

Today’s report is the start of a new series that goes far deeper. In an attempt to see how extensive the practice is in the state’s construction industry – and at what cost – we gathered payroll records submitted by private companies hired to build federally funded or backed affordable housing projects.

The U.S. Department of Housing and Urban Development tried to block The N&O’s access to records stored at dozens of agencies across the state, saying it wanted to control release of the records. The newspaper, along with The Charlotte Observer, filed a lawsuit in June 2013; we eventually collected tens of thousands of pages of payroll records for 64 projects larger than $1 million built from 2009 through 2013.

Other newspapers owned by McClatchy, The N&O’s parent company, gathered payroll records in other states. In many of the records, companies showed no tax withholding for workers who should not qualify as independent contractors under IRS rules.

In consultation with more than a dozen economists, statisticians and accountants, The N&O devised a formula to calculate lost tax revenue for the entire construction industry in North Carolina and two other states.

We applied rates of misclassification within each construction trade to corresponding census counts for each trade. We applied annual tax rates based on median wages seen in the records.

Workers issued a 1099, a tax form given to independent contractors and filed with the federal government, tend to report a smaller share of their income. The IRS estimates that self-employed workers under-report their income by 56 percent. Those paid in cash with no tax forms report even less. Employees, subject to withholding, pay 99 percent of the taxes owed.

McClatchy reporters interviewed nearly 50 misclassified workers found on the 64 projects examined. Nearly half of them said they were provided no 1099 tax forms by the companies that hired them.

We want to know your thoughts and experiences with misclassification. Share your feedback directly with the reporters: mlocke@newsobserver.com or 919-829-8927; or on Twitter @mandylockenews.

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