How the Hospitality Industry Cheats the Tax System

Published: 03rd September 2008
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Weddings. Galas. Corporate luncheons. Conferences. When big events roll through town, it can mean big money to the places that host them, but it can also mean that they have to hire temporary people to do the things that their staff would normally do - like serving food, greeting guests,and mixing your drinks at the bar.



To meet these needs, many hotels, casinos, restaurants, and catering companies rely on staffing agencies when they need a few extra hands on deck. Staffing agency employees may also fill in for any staffing shortages, acting as bartenders, housekeepers, chefs, dishwashers, and hosts on short- or long-term assignments. And, even though the companies are a good idea, some of these staffing agencies are a continual, painful blemish on the hospitality industry due to their tax evasion policies.



And they're not just ripping off the IRS - this tax evasion affects taxpayers, the entire hospitality industry, and, ultimately, the hospitality industry employees.



How tax evasion works



The tax evasion in the service and staffing industries is simple: by reporting rightful employees as "independent contractors" to the government, staffing agencies can avoid paying hefty employment taxes.



This means that the employees themselves end up footing the bill for all of their employment taxes, all the while forgoing regular employee benefits - like health insurance coverage. Moreover, this tax evasion hurts the entire hospitality industry.



Staffing agencies who properly file and pay taxes on their employees can't keep their prices competitive. And the contracting institutions, like hotels, restaurants, and casinos, may find themselves in sticky legal liability situations.



And that's not to mention the toll this takes on the taxpayers: Tax evading staffing agencies withhold money from public funds while depleting the resources of government assistance programs.



It's important for all hospitality industry professionals to know exactly what they're getting when they hire a staffing agency. Certainly not all hospitality staffing agencies purposefully try to defraud the government. But the ones that do get away with it rely on the hazy, often confusing employment law question of where an employee stops ... and a contractor begins.



Contractor ... or Employee?



The IRS has very clear rules about properly classifying employees. Their website, www.irs.gov, has an entire section devoted to the problematic question of contract workers and employees, but the basic rundown is:



Independent Contractors



IRS rule: "An individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result."



This means that an employer can't tell an independent contractor when to be at work, when to leave work, how to do his work, what to wear, etc. The employer can only control the deadline by which the independent contractor's work must be finished.



In addition, certain other conditions characterize the nature of contractors. As a contractor:



You must supply your own equipment and materials to complete the job

You are usually not trained by your employer

You do not derive all of your income from one employer - you regularly contract with several different companies

You do not collect benefits from their employers, such as vacation time, sick pay, pensions, or health insurance

You are not required to have legal status or I-9 documentation

You must file your own taxes using IRS forms W-9 and 1099-MISC



In other words, contractors are self-employed service providers. Contractors have the option to control their workload and their earning potential by working on more or fewer projects at once.



Employees

IRS rule: "Anyone who performs services for you is your employee if you can control what will be done and how it will be done."



As an employee, your working conditions are different than contractors, mainly because your boss (or boss's boss, or someone in the company) has complete control over and responsibility for your job performance.



Your employer sets your schedule

Your employer tells you what to wear (dress code, uniforms)

You employer trains you to do a job a specific way

Your employer provides all the materials you need to do your job (from building skyscrapers to stapling papers)

Your employer specifies project deadlines

Your employer provides benefits: health insurance, vacation pay, sick time, paid holidays, overtime, personal days, pension plans, etc.

Your employer automatically deducts half of your income taxes from your paychecks, and pays the other half out of their own pocket, in accord with IRS form W-4



Employees enjoy the confidence and reliability of steady work - and steady income. While you usually don't have the option to make more money by working for several employers at once, you do profit from your employer's benefits packages, like paid vacations and holidays.



So, Hospitality Staffers Aren't Contractors Because:

None of the IRS conditions for contractors apply to them. Consider the following:



They are told where and when to be at work (Employee status)

They are required to comply with a dress code, sometimes supplied by their employer (Employee status)

They undergo intense training, often to the specifications of individual hotels, casinos, and restaurants (Employee status)

They do not work for competing staffing agencies - they receive their income from a single employer (Employee status)



Their employment conditions clearly suggest that hospitality workers are in fact employees - not contract workers. And yet, by being misclassified as independent contractors, they end up as victims of tax evasion.



Who Loses Out, and Why:



The Staffing Agency Employees



Because they don't receive the benefits associated with employees or contractors, staffing agency employees lose double fold. For instance, these staffing agency employees do not receive health insurance, paid time off, vacation days, or any other employer perks. Instead, these staffing agency employees are stuck paying all of their taxes out of pocket, without profiting from the flexibility and freedom that contractors enjoy.



Competing Staffing Agencies

Law-abiding staffing agencies must pay Federal Employment, Social Security, Medicare, and Unemployment taxes. They must carry liability insurance for all employees, verify that all employees have legal documentation, and they may offer extra benefits, like paid time off and health insurance. That's a lot of overhead.



To compensate for this overhead, these added expenses are often passed on to clients. This makes it increasingly difficult for the legitimate staffing agencies to keep their prices competitive when compared to the staffing agencies that continually cheat the tax system.



Hotels, Restaurants, Casinos, and Caterers



The institutions who use staffing agency employees should always be careful of who they choose. If a staffing agency is reporting their employees as contractors, chances are that they don't carry liability insurance on their employees either.



If a temporary employee is ever injured while working on-site at a hotel, restaurant, casino, or other event, the contracting institution may be liable for any resulting medical bills. And getting caught in the middle of a legal battle like this is a huge price to pay for hiring a few temporary staff members.



Everyone Else



While it may be obvious that tax evasion affects everyone, down to each individual taxpayer, it's perhaps not as obvious how employment tax evasion burns the candle at both ends.



Staffing agencies that purposefully engage in tax evasion don't pay taxes on their employees, ultimately withholding money from public funds. Likewise, because they don't have to offer any benefits, and because their employees must pay all taxes out of pocket, they encourage their employees to take advantage of government assistance programs - like Medicaid. Staffing agencies that engage in tax evasion exert a hefty toll on the public system, draining the government twofold.



Choosing a Reputable Staffing Agency:



If you're responsible for hiring a staffing agency, it's important to do your homework beforehand to ensure that you're not adding to the problem. Know who you're choosing - and what you're getting yourself into.



Conduct background checks on the agency itself and ask a lot of questions. Does the agency have I-9 legal documentation for all workers? How about liability insurance? Are their workers classified as contractors or employees?



Be wary if a staffing agency quotes you a price that's well-below industry standards. Remember, a few simple questions about the character of the staffing agency can save you major bucks and legal headaches in the future.



This report is published by Penguin Staffing. Located in Alexandria, Virginia, Penguin Staffing is committed to improving and enhancing the efficiency of the hospitality staffing industry. For more information about Penguin Staffing, please visit www.penguinstaff.com or call 703-538-5900.

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