A report published in June by the Economic Policy Institute shows that 10 to 20 percent of employees nationwide are misclassified by their employers, costing the government billions in tax revenue each year.This fraudulent action is done to help companies increase their revenue by classifying employees as independent contractors instead of direct employees. Workers classified as independent contractors are not subject to minimum wage or overtime laws.By taking this action, employers are able to avoid paying a number of taxes, such as payroll taxes, the employer’s share of Social Security and Medicare, and state and federal unemployment. Furthermore, they do not have to pay workers’ compensation premiums or disability insurance.Additionally, companies using this tactic have been found to be paying workers in cash – especially if the individual is an undocumented worker.As the report's author, Francoise Carre, writes, “[T]he labor cost differential is estimated to range from 20 percent to 40 percent of payroll when employers do not pay the unemployment insurance tax, workers’ compensation premiums, the employer share of Social Security, and pension or medical insurance.”A 1984 study by the Internal Revenue Service found that 15 percent of employers engaged in misclassification of 3.4 million workers, resulting in an estimated loss of $1.6 billion in Federal Insurance Contributions Act (FICA) tax revenue. If adjusted for inflation, the estimated loss would be $3.5 billion in 2014.The loss in tax revenue affects local, state, and federal governments not only from an income standpoint, but also adds cost by forcing the government to provide additional social services to uninsured, misclassified workers.Despite losing billions each year in taxes, there is little the Internal Revenue Service can do to stop the problem. The Safe Harbor Rule allows companies to misclassify workers as independent contractors for tax purposes, even if it has been demonstrated that they are, in fact, employees. This same rule prohibits the IRS from seeking back taxes or in any way ordering a change of status for the worker.Sadly, any employer can be granted Safe Harbor if they show they misclassifying workers for a “reasonable basis” or if the practice is widespread within the industry.Besides costing taxpayers billions of dollars, this problem also erodes labor standards. Carre claims misclassification is a threat to labor because it “has a chilling effect on a worker’s ability to raise concerns about, or bargain for, improvements in either the terms of employment (pay, work hours, etc.) or working conditions. In union environments, if misclassification occurs it may undermine compliance with the terms of a bargaining agreement.”Safe Harbor has been on the books for 37 years and costs the government billions in lost revenue each year; the U.S. Treasury estimates that eliminating Safe Harbor would generate $9 billion in tax revenue over 10 years.