Managing employee payroll taxes can get quite complicated, with a number of areas being particularly opaque. One of those is the question of employee classification; is a person properly classified as a worker or an independent contractor?
Misclassifying workers as independent contractors carries with it some significant consequences, including penalties and even potential fraud prosecution, so it is a topic worth exploring in some detail.
The California payroll tax structure for an employer in this state is based on four distinct taxes, commonly referred to as the CA SUI, ETT, SDI, and PIT payroll taxes. There are different rates for each of these taxes and the calculation methods are different as well.
The California Employment Development Department can legally withhold money owed to you by the state for repayment of debt. In other words, either through error or willful action, you owe a monetary debt to the State of California.
The EDD is within its legal rights to withhold money from a variety of programs and tax refunds if you do not pay up. It works with the California Franchise Tax Board, the State Lottery, and the State Controller to collect the outstanding debt.
It is that most un-wonderful time of year: tax time. April 15 may be a bit far away, but as a small business owner, you need to get your documentation for 2016 together as soon as possible. Your tax professional will thank you.
By the way, one of the changes for next year includes moving a filing deadline from April 15 to March 15 if your business structure is a pass-through. More on that later. First, here is a rundown of the documents you need to gather for your accountant.
What does the employment classification of workers have to do with payroll tax audits?
Everything.
When the Employment Development Department of the State of California decides to audit, the classification of your workers is the auditor’s sole concern. Additionally, the IRS often adopts the results of the EDD audit to use in assessing federal penalties.
For this reason, it is critical to classify your workers properly and supply only the information the auditor asks for, nothing more.
In a previous post, we talked about the difference between independent contractors and employees. One of the biggest differences, and one that often drives intentional worker misclassification, is that employers must withhold and pay payroll taxes for employees whereas they do not for independent contractors.
You have hired someone to do work for you. Is that person an employee or an independent contractor?
The answer is important because misclassifying an employee as an independent contractor, whether intentionally or through ignorance, can land you in court and in debt for payroll taxes.
There are several tests from a variety of regulatory agencies that are used to try to determine employment status and occasionally changes are made to the standards. Even if you classified certain of your workers correctly before, you might need to revisit the question to ensure you remain in compliance.
Small businesses, of which there are thousands in California, spend the highest percentage of time of any business entity preparing and submitting taxes. Federal, state, and local tax requirements are extremely complex and change every year.
Multiple agencies administer different taxes, and each has its own set of rules and methods of payment. It is no wonder that small business owners often have common tax issues and outcomes of inadvertent noncompliance.
Part of being a business owner is filing and paying payroll taxes for your employees. In California, the Employment Development Department, or EDD, administers these taxes. In addition to receiving tax filings and payments, the EDD also identifies and investigates potential infractions of tax law.
What do you do if you develop tax problems and find yourself on the receiving end of an audit?
If you have employees, you are liable for federal payroll taxes. Some taxes are withheld from your employee’s wages, some you must pay yourself.
The Internal Revenue Service, or IRS, administers payroll taxes as part of its responsibilities. Remaining in compliance means understanding how and when payroll taxes are calculated, filed, and paid.