The “Contract to Cheat” project was born out of an investigative reporting partnership between the Star-Telegram and The News & Observer in Raleigh, N.C., which published a project that examined companies illegally treating employees as independent contractors in 2012.
In an attempt to see how extensive the practice in Texas’ construction industry is — and at what cost — the Star-Telegram gathered payroll records submitted by private companies hired to build federally funded or backed projects, including highway and road construction, schools and housing developments.
The Star-Telegram used the Texas Public Information Act to seek the records. That effort took more than one year.
Agencies, including the Fort Worth Housing Authority and the Housing Authority for the city of Austin, provided the records promptly. But in many cases, the information took months to obtain in part due to delaying tactics by some local agencies in Texas.
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The Lewisville school district and the city of Fort Worth, the Texas Department of Transportation, offices in Fort Worth and Dallas, sought to withhold some or portions of the information by seeking a ruling from the Texas Attorney General’s Office. The city of Dallas filed suit to withhold the records, then released them months later and dismissed the suit. Other agencies, including the San Antonio Housing Authority, would not agree to release the information without redactions to employee names.
Other newspapers owned by McClatchy, the parent company of the Star-Telegram and The News & Observer, also 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 Texas, most of the companies that did not deduct taxes from gross payroll were involved in public housing projects.
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, Texas and Florida.
Rates of misclassification within each trade were applied to corresponding census counts for each trade. Annual tax rates based on median wages seen in the records were factored in.
Workers issued a 1099, a tax form given to independent contractors and filed with the federal government, report a smaller share of their income. The IRS estimates that self-employed workers underreport their income by 58 percent. Those paid in cash with no tax forms report even less. Employees subject to withholding pay 99 percent of the taxes owed.
The Star-Telegram randomly surveyed records for thousands of workers on the 40 projects examined. From those, 30 projects — mostly housing developments in excess of $1 million — 4,000 workers were surveyed. The payrolls showed that more than 37 percent of those workers had no tax deductions for Social Security, Medicare, federal and unemployment taxes owed.