State & Local Tax Perspective: Construction Contractors Beware in Illinois

ConstructionThe Illinois Department of Labor requires that construction contractors file on or before January 31 of each year a report of all payments made to an individual, sole proprietor, or partnership that performs construction services for the construction contractor and is not classified as an employee.

While so far the Department of Labor (“DOL”) has not audited these Reports, it is required by Illinois statute to provide share information with the Illinois Department of Employment Security, the Illinois Department of Revenue, and the Illinois Workers’ Compensation Commission, which are known to audit the Reports. What Illinois is generally looking for is misclassification by construction contractors of employees as independent contractors. The first time a construction contractor’s Report is audited, the penalty for such misclassification is $1,000 per misclassification (e.g., if 50 individuals are misclassified as independent contractors instead of employees, the fine is $50,000). After the first audit, the penalty is increase to $2,000 per misclassification. Also, such misclassification would subject the contractor to other taxes and fees administered by the other Illinois agencies, such as on the underpayment of unemployment insurance and employee withholding. In addition to penalties, the DOL has been granted other policing powers to enforce reporting.

A concern is that eventually such reporting will be required of other industries that commonly use independent contractors and may have various issues as to when such parties are truly independent contractors or employees. For instance, consulting and software firms often are at risk for “misclassification of employees”.

It is recommended that construction contractors become familiar with these requirements and comply with these rules accordingly. The DOL has a Report form on its website, or the contractor may design its own form, so long as it contains the required information. Consultation with a professional is suggested, at least for the first compliance cycle.

Lawrence Ewing

Lawrence Ewing is the Director of State and Local Tax for CDH. http://www.cdhcpa.com
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