Budget Shortfalls Exacerbated by Payroll Fraud

Loren Steffy, in his Sunday column for the Houston Chronicle, spells out the impact of payroll fraud and worker misclassification on the US deficit.  He says that two things are happening that are symptomatic of the situation.

First, by misclassifying workers as independent contractors or 1099 workers, the employers in the construction industry and in other labor intensive industries like hospitality and food service are not paying the taxes or benefits on the workers they hire.  Steffy states:

“For every $1,000 employers pay in wages, they are supposed to collect from employees $14.40 for Medicare and $42 for Social Security.  In addition, employers are supposed to contribute $62 themselves to Social Security, another $14.50 for Medicare and $25 for unemployment insurance.”

The employers are not paying, and the US government is not receiving those dollars.  This tax avoidance further adds to our deficit.

Second, he says that when the Medicare and Social Security taxes are deducted from the paychecks of illegal workers, that money will never be paid back to the workers in the form of benefits and they are essentially subsidizing the system.  Steffy estimates that at least $12 billion is being lost each year in the construction industry alone.

The economy is driving some responsible employers to the brink of bankruptcy and they are laying off workers who then work as independent contractors and further contribute to the problem.

This is, as my friend from MIT told me, a systemic problem that will have to be solved systemically.  Believe it or not, a sensible immigration policy and strict enforcement by the Department of Labor would go a long way to correcting the issue.  I wonder which of the political candidates will take up that banner during this election cycle?