There is something wrong with this picture?

Imagine a contract labor firm hires a welder from Mississippi. The welder becomes an employee of the local contracting company, but works at a local shipyard. The shipyard pays the contracting company a set fee. The contracting company pays the worker a salary and a per diem to cover travel and lodging expenses.

At first sight, this picture appears normal.

Now, imagine the welder receives $7 per hour in salary and $13 per hour in per diem. Income taxes, Medicare and Social Security are withheld from the salary check, while no taxes are withheld from the much larger per diem check.

The picture now seems to become a bit gray.

Adding to it, the contracting company issues a W2 to the welder at the end of the year reporting the salary but does not issue a Federal Form 1099 to report the per diem income. Since the Internal Revenue Service is not aware of the per diem income, the welder doesn’t claim it on his personal taxes and pockets the entire amount.

The picture darkens.

Now, imagine the welder isn’t from Mississippi and doesn’t live in a hotel.

The worker is a resident of the Tri-parish area and lives at home. He receives the same per diem, but doesn’t have the additional living expenses.

And since only the salary is reported to the IRS, the welder qualifies for food stamps, other public assistance and the lucrative earned income credit.

If this picture looks extremely ugly to you, it should … it is also real.

A local business owner painted this picture for me last week. He employs a contract labor firm that operates as described.

“I have no choice but to use the company,” said the owner, who asked that he not be identified. “I have tried to hire the workers directly, but when they discover that taxes will be taken out of their entire income, they tell me no.”

He has even lost full-time employees to the labor contractor, only to re-employ them as contract labor.

“I know I’m not alone,” he said. “It doesn’t matter to them that I’ll pay for their healthcare and match their retirement – not while someone else promises them tax-free money.”

While not all labor contractors operate as described, many do – despite laws that require every business to report all employee income to the IRS. Under-reporting wages is illegal and could result in stiff penalties for both the company and the employee if discovered.

It also hurts economic development by skewing income statistics.

If you work for a labor contractor who isn’t reporting all of your income, make sure you protect yourself by doing so on your personal tax return. If not, you may one day find yourself in front of an IRS auditor and a picture of a different kind – a mug shot.