State Tax Developments Affecting the Construction Industry

The following is a brief summary of recent state legislation related to contracts, prevailing wages, overtime and family leave that could affect you or your construction business.

VIRGINIA

Prohibition on Pay-When-Paid Clauses in Construction Contracts

Virginia amended a portion of the Virginia Prompt Payment Act (VA Code 2.2-4354) and a portion of the Virginia Wage Theft statute (VA Code 11-4.6) to prohibit the use of pay-when-paid clauses in construction contracts between general contractors/higher-tier contractors and subcontractors.  This applies to contracts awarded by state or local government agencies as well as private contracts that include at least one general contractor and one subcontractor.  Contractors should watch their contract clauses now, particularly in the “venue/disputes” sections to see what state law applies. (Effective January 1, 2023, pending any further changes from the Governor)

Virginia Overtime Wage Act (VOWA)

This law went into effect in 2021, however amongst confusion on the guidelines Virginia employers were given a reprieve, as provisions of VOWA were repealed and revised in 2022.  Revisions allow employers to once again rely on the Fair Labor Standards Act (FLSA) regulations, guidance, rules and governing case law in determining their overtime obligations to employees. 

  • For non-exempt employees paid on an hourly basis, the calculation of the employee’s regular rate of pay and overtime is the same under FLSA and VOWA (Overtime = 1.5 x regular pay)
  • Amendments preserve an employee’s private right of action under VOWA, granting employees access to state courts to bring their individual or collective-action claims for unpaid wages, including overtime.  (Effective July 1, 2021, but amended/revised in 2022)

Family Leave Insurance

Establishes family leave insurance as a class of insurance: an insurance policy issued to an employer related to a benefit program provided to an employee to pay for the employee’s income loss due to i) birth of child (or adoption or placement through foster care), ii) care of family member with serious health issue, iii) circumstances arising from family member in military with call to active duty. (Effective July 1, 2022)

Worker Misclassification Update

Background: Beginning January 1, 2021, Virginia adopted the IRS definition of worker misclassification, which assumes that an individual is an employee unless the business can prove the individual is an independent contractor pursuant to IRS guidelines.

Update: This law provided the Virginia Department of Taxation authority to initiate audits to investigate worker misclassification issues.  Virginia has begun audits with businesses and industries issuing 1099-NECs and 1099-MISCs to determine if the classification was appropriate.

  • Employers in violation will be assessed penalties: $1,000 for first offense, $2,500 for second offense, and $5,000 for third offense per misclassified individual.
  • Employers with more than one misclassification violation will be banned from certain government contracts for up to a year, and two years for subsequent violations.
  • Businesses will also be liable for withholding taxes for improperly classified individuals, including penalties and interest.

MARYLAND

Prevailing Wage Stop Work Orders

This new law at Section 17-221 of the State Finance and Procurement Article allows the Commissioner of Labor and Industry to stop an entire project when any contractor working on the contract fails to pay employees according to Maryland’s prevailing wage laws.  Contractors on any tier of the project could be affected if the state halts a project, including contractors that did not violate the prevailing wage laws.  Under this law the state is required to notify the offending contractor, meet with them within 48 hours of issuing the stop work order, and provide a reasonable timeframe to resolve the violation.  (Effective October 1, 2022)

Prevailing Wage Law Expanded to Mechanical Systems Service Contracts

The state’s prevailing wage requirements were expanded to include “mechanical systems service contracts,” which include contracts for HVAC (including ductwork), refrigeration systems, and certain plumbing, electrical, and elevator systems.  The $2,500 threshold means many contractors will be required to comply with prevailing wage laws on public buildings with service contracts in excess of $2,500.  The Commission of Labor and Industry will be establishing regulations to refine the scope of the act and what contracts will be covered. (Effective October 1, 2022)

Family and Medical Leave Insurance Program

This law requires employers to provide up to 12 weeks of paid leave based on certain family or medical events, including the birth of a new child, military deployment, and serious health conditions of family members of an employee or the employee.  This can be extended to 24 months in certain conditions.  The law will be funded by contributions of employees and employers with 15 or more employees.  Contributions to the fund will begin October 1, 2023.

MINIMUM WAGES

The Virginia minimum wage increased from $9.50 to $11.00 per hour effective January 1, 2022.   Additional increases will move the minimum wage to $12.00 per hour on January 1, 2023 and several more increases will take place over the upcoming years until it eventually reaches $15.00 per hour in 2026.

The Maryland minimum wage increased from $11.75 to $12.50 per hour effective January 1, 2022 for employers with 15 or more employees, and increased from $11.60 to $12.20 per hour for employers with 14 or fewer employees.  Some localities in Maryland have set their own minimum wage limits.  For example, Montgomery County has a minimum wage of $15.00 per hour for employers with 51 or more employees, $14.50 per hour for employers with 11-50 employees, and $14.00 per hour for employers with fewer than 10 employees.

The DC minimum wage remains $15.20 per hour.

The Federal minimum wage for covered nonexempt employees is $7.25 per hour.

In cases where an employee is subject to both the state/locality wage laws and the Federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.  The Federal minimum wage provisions of FLSA apply to “employees of enterprises that have annual gross volume of sales or business done of at least $500,000”.

If you have questions regarding any of the new tax laws explained here, please contact us at or 703.385.8888.


Written by Sarah Ferens, CPA:

Sarah Ferens

Sarah is a Tax Manager at Thompson Greenspon and has been with the firm since 2003. Prior to joining the firm she worked in both public and private industry, with positions ranging from auditor at a Big 4 firm, controller of a high tech start-up company, accountant at an international conglomerate and payroll manager of a nonprofit organization in the DC Metropolitan area. With over twenty-five years of experience, Sarah brings a strong background of management, tax and accounting support services to our team, along with providing financial advisory services to our small and large businesses.

Sarah specializes in tax compliance for C Corporations, S Corporations, partnerships and complex individual tax returns. She is responsible for the review of Federal and multistate tax returns, tax research, and supporting a variety of clients that have multiple lines of businesses and filing entities. She also has significant experience in the tax consequences of bankruptcy filings and insolvency.

Sarah received her Master’s in Accounting from George Washington University and her Bachelor of Education from the University of Virginia, where she was a scholarship athlete and NCAA Division I All-American in swimming. She actively participates in her community, supporting her children through volunteer activities relating to their education (PTA), sports (swim and crew teams), and arts (theater, orchestra and band). Sarah is a member of the American Institute of Certified Public Accountants and the Virginia Society of Certified Public Accountants.


Information provided on this web site “Site” by Thompson Greenspon is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Thompson Greenspon has made every reasonable effort to ensure that the information provided is accurate, Thompson Greenspon, and its shareholders, managers and staff, make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. Thompson Greenspon also does not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Information contained on this Site is protected by copyright and may not be reproduced in any form without the expressed, written consent of Thompson Greenspon. All rights are reserved.

Share: