A big part of companies' federal tax responsibilities is paying employment taxes for their workers. These are the Social Security, Medicare and unemployment taxes on those employees' wages.
However, when it comes to workers who are hired as contractors, it's the worker who's totally responsible for these taxes, in addition income tax withholding via estimated tax payments.
That's why, when appropriate and fiscally feasible, many firms try to hire independent contractors.
Sometimes, though, the line between employees and contractor is fine. It's facts and circumstances in each case when deciding how to classify a worker.
And if the Internal Revenue Service subsequently determines a company has crossed it by misclassifying workers as independent contractors, the employer faces paying the back employment taxes.
Depending on how long the workers have been carried on the books wrongly, the results could be very costly for the offending companies.
That's why more than half a million employers are freaking out a bit about the no-match letters they recently received from the Social Security Administration (SSA).
No-match workers could be costly: These communiques get their name because they inform the employers that the names of some of their employees do not match their Social Security numbers.
The SSA has mailed no-match letters to more than 570,000 employers since March. That earns this weekend's By the Numbers recognition.
It also is sending shock waves through the hospitality, construction and agriculture industries, which rely heavily on undocumented workers, according to Miriam Jordan's story in The New York Times.
The notifications direct the employers do what is necessary to reconcile the mismatches. In most cases, that's speaking to the workers to determine the issue in question. It could be as simple as an unreported name change after a marriage.
But in many cases, the mismatches are because the workers are undocumented immigrants who are using fake Social Security numbers to get hired.
In the case of those without legal status, the workers tend to resign rather than possibly face federal immigration agents.
The sudden loss of workers, writes Jordan, is sending shock waves through the hospitality, construction and agriculture industries, which rely heavily on undocumented workers. The employers are conflicted, she says, trying to decide whether to take the action requested by the no-match letters and risk losing workers now or to do nothing and possibly face fines later.
ICE involvement: The mere receipt of a no-match letter does not necessarily or automatically lead to penalties. But, notes' Jordan, Immigration and Customs Enforcement (ICE) routinely asks firms subjected to I-9 audits whether they have received no-match letters.
Form I-9 is used to verify that employees are legal U.S. residents and are authorized to work in the country. I-9 audits have increased under the Trump Administration.
Where a business has received no-match letters, those documents can be used to prove that the company had "constructive knowledge" of employing undocumented immigrants, raising the potential for criminal charges and hefty fines.
"The irony is, if the employers and workers hadn't been paying taxes, the businesses wouldn't have been sent the no-match letter," Manuel Cunha Jr., president of the Nisei Farmers League in Fresno, told The New York Times.
He and others predicted that the new measure would very likely push many workers underground and into the cash economy.
Cash economy could cost benefits: Some undocumented workers still might pay self-employment taxes when the file returns, using ITINs, or Individual Taxpayer Identification Numbers, to report their cash earnings.
They do so in hopes that one day the United States will offer a citizenship opportunity. Paying taxes for work they did while not in the country legally is one way to show that they are committed to being solid U.S. citizens.
But realistically, the loss of taxes when the workers are paid cash instead of checks that include withholding of income and employment taxes, could be substantial.
And the corresponding reduction in Social Security taxes, which are paid under the undocumented workers false ID numbers, undermines the stability of the federal retirement benefits system.
That in turn feeds the GOP narrative that Social Security needs to be dramatically restructured, with reduced benefits and even partially privatized, to ensure it lasts longer.
That's not to say that the matter of illegally hired workers, be it because of honest employer misclassification mistakes or employee status deception, shouldn't be dealt with properly.
It's just another example of how one solution often — usually — affects, sometimes adversely, another thorny issue with widespread ramifications of its own.
Or to wrap it up neatly with a bow, hello life.
You also might find these items of interest:
- Taxes paid by undocumented workers
- DREAMers, other undocumented workers make major tax contributions to Uncle Sam, state treasuries
- Tax identity theft solutions get complicated when Social Security, undocumented immigrant tax ID numbers meet