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What is UI payroll tax fraud?

Unemployment payroll tax fraud is when an employer deals in cash-only or uses other schemes to conceal their activities and their true tax liability. This is also referred to as the underground economy, tax evasion, tax fraud, cash pay, tax gap, payments under-the-table, and off the books.

Examples of UI payroll tax fraud could include:

 

  • Misclassifying employees as independent contractors
  • Neglecting to report all wages paid and to pay payroll taxes
  • Paying employees in cash or under-the-table to avoid paying taxes
  • Filing false payroll returns
  • Practicing rate manipulation schemes

Misclassifications

Misclassifying employers have artificially low costs because they have not covered the cost of unemployment insurance contributions and workers' compensation for their employees. Law abiding businesses that properly classify their employees are subsidizing businesses that misclassify and could end up paying higher unemployment insurance contributions, higher workers' compensation premiums, and higher taxes than would be required if all employers followed Tennessee law.

Worker misclassification occurs when any employer treats workers as "independent contractors" when they are employees. Some employers use this tactic to avoid compliance with:

  • Unemployment benefits for individuals (UI) Unemployment Insurance
  • Workers' Compensation
  • Minimum wage and overtime
  • Social Security
  • Tax withholding
  • Employee Classification Act - construction workers who believe they have been misclassified may also want to visit the TN Department of Labor.

General Characteristics of Employee & Independent Contractor

  Independent Contractor   Employee
  • Free from direction and control
  • Has necessary skills and training to complete job
  • Has a business location
  • Performs services for multiple customers
  • Sets own hours
  • Determines own price for contracted services
  • Not eligible for employee benefits
  • Provides equipment and tools used to complete job
  • Supplies materials needed to do job
  • Personally liable for errors and/or accidents
  • Files self-employment taxes
  • Has right to hire and fire workers
  • Must legally complete each contract

 

  • Means and manner of work are (or can be) controlled by employer
  • May be trained by employer to perform job
  • May work at employer’s business location
  • Works for one employer, may serve that employer’s customers
  • Hours set by employer
  • Accepts wage, salary, or commission determined by the employer
  • Employer may provide and control equipment and tools
  • Employer may purchase materials and supplies
  • Employer liable for employee errors and/or accidents
  • Is hired and can be fired by employer
  • May quit working for an employer at any time
  • Employer may require specific attire to be worn while at work such as a uniform or shirts with company logo

What happens if UI benefit fraud is committed?

If an individual commits UI fraud, you could face a variety of serious penalties. These include:

  • Prosecution by government authorities
  • Possible jail or prison sentences
  • Repaying the UI benefits collected, plus penalties and fines
  • Forfeiting future income tax refunds
  • Losing the eligibility to collect UI benefits in the future
  • Up to five years in prison per offense
  • Up to $5,000 fine per offense

Report Unemployment Insurance Payroll Tax Fraud

You may report an employer who hires a worker and improperly classifies the person as an “independent contractor” rather than as an “employee" or the employer pays the worker in cash with no tax deductions by contacting the worker misclassification Fraud Tip Line at 1.888.243.7283 or you can complete the Employee Misclassification Fraud Tip Form.