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Tax News for Tax Professionals

e-File/e-Services workshops starting September 3, 2008

Starting September 3, 2008, the Employment Development Department (EDD), along with the Franchise Tax Board (FTB), the Board of Equalization (BOE), and the Internal Revenue Service (IRS), are sponsoring no-fee e-file/e-Services workshops. For more information and to register for a workshop near you, visit FTB’s Web site at www.ftb.gov.

New Multi-Agency Form for Offer in Compromise

The Board of Equalization (BOE), the Employment Development Department (EDD) and the Franchise Tax Board (FTB) have developed a single form, the Multi-Agency Form for Offer in Compromise (DE 999CA) that individuals can use for any of the State's tax agencies.

Taxpayers may apply for an Offer in Compromise (OIC) when they are unable to pay their full tax liabilities to the State. The program allows taxpayers, under certain circumstances, to negotiate a reduced amount of their nondisputed tax liabilities. The State will consider an OIC when it is unlikely that the tax liability can be collected in full, and the amount offered reasonably reflects collection potential.

The individual agencies must still negotiate each OIC separately for their respective taxes. For example, the FTB only can negotiate a State income tax liability, and the Board of Equalization only can negotiate a sales or use tax liability. For more information on EDD's Offer in Compromise program, view the Offers in Compromise Information Sheet (DE 631C) or contact the OIC Unit at (916) 464-2739.

New IRS Form 944 - No Impact on EDD

On January 3, 2006, the IRS issued temporary and proposed regulations that would allow certain small businesses to file and pay their federal employment forms and taxes annually instead of quarterly.

The new IRS Employers Annual Federal Tax Return (Form 944) program will not affect your EDD California payroll tax deposit requirements. Employers should continue to deposit according to the deposit schedule in the current year's California Employer's Guide (DE 44).

In addition, this action by the IRS does not change EDD's requirements for wage reports to be filed quarterly. Employers should continue to file their Quarterly Wage and Withholding Report (DE 6) or Report of Wages and Withholdings for Employers of Household Workers (DE 3BHW) each quarter.

For additional assistance with your taxpayer needs, contact us at 1-888-745-3886.

Employment Status (ES) Course Available in Multiple Formats

The EDD now offers three ways to help employers avoid unplanned tax liabilities by properly classifying their workers as either employees or independent contractors. They are:

We encourage you and your clients to use these tools to assist you in determining the correct status of a worker as an employee or independent contractor. If you have clients who have personal computers but no Internet access, you can order the ES Course in an interactive CD format by calling Diane Best at (916) 464-3518. The CD is available at no cost.

For more information about the ES Course, please contact Rob Soriano at (805) 654-4915.

A Word About Employees and Independent Contractors in the Courier and Messenger Industry

Background

During the past several years, California and other states have experienced a significant increase in the number of business attempting to cut operating costs by erroneously converting employees to independent contractors (ICs). However, these businesses are only creating the appearance of independence when EDD still considers these workers to be employees.

This scheme has been heavily promoted by third-party contract providers, who charge a fee for administering the scheme and allegedly provide insulation between the employer and the workers by creating an arm's-length relationship. In the past, third-party contract providers have been successful in promoting their system as a legitimate business strategy by marketing it through business associations and employer groups. However, due to an intense effort of education and enforcement by State and Federal agencies more business owners are now aware that these schemes are not legal in California and should be wary of utilizing third-party providers.

If all companies do this, isn't it an industry standard? If so, then it's a level playing field-right?

Wrong! There are real victims resulting from this noncompliance. Of the approximate 1,400 courier companies that operate in California, we estimate that 800 properly classify their drivers as employees. However, it is getting more difficult for companies who operate properly to compete against those who incorrectly classify their drivers as ICs. Drivers improperly classified as ICs typically receive less pay then their employee counterparts. The individual drivers are just trying to make a living; they have no choice. Also, these workers are not covered for unemployment, disability, and workers' compensation insurance. They typically must pay the cost of liability insurance and other traditional employer costs. In effect, these companies have passed their costs down to their drivers.

What do the courts say?

Several important published court decisions relating to courier drivers have been issued:

  • JKH Enterprises v. Department of Industrial Relations (2006) 142 Cal. App. 4th 1046, the Court of Appeal
  • Air Couriers International v. Employment Development Department (2007) 150 Cal. App. 4th 923, the Court of Appeal
  • California Unemployment Insurance Appeals Board Precedent Tax Decision P-T-495 (2007), NCM Direct Delivery v EDD

The sum of the above cases provides substantial support of EDD's position that the courier drivers are employees. In September 2007 EDD published the Courier and Messenger Industry Information Sheet (DE231CI) which provides highlights of these cases.

EDD continues to receive numerous complaints.

EDD continues to receive numerous complaints from employers and workers. The employers who are properly reporting their drivers as employees indicate they cannot fairly compete with companies using these types of schemes. They demand we level the playing field. We agree and this issue will remain a top priority for EDD.

What is EDD doing?

In 2002, EDD found that every company using or following a third-party contract provider scheme was out of compliance with California payroll tax laws. In 2003, EDD spearheaded a multi-agency education and enforcement initiative to level the playing filed for the courier and messenger industry in California. The initial effort relied heavily on seminars offered throughout the State. An investigation and audit effort followed the seminars. Between November 2003 and November 2007, EDD audited over 480 courier businesses that operate in California. These audits found over 23,600 drivers misclassified as independent contractors who should have been reported as employees. The audits resulted in the issuance of tax assessments that totaled over $52.6 million, including penalties and interest.

EDD will continue to provide education and conduct enforcement efforts in partnership with other State and Federal agencies.

What Can You Do?

Tax Professionals: If a client asks you about these schemes, we recommend that you educate them about common law. It is important for them to know the risks of improperly classifying drivers as ICs. If EDD conducts an audit of a business and finds the business out of compliance, the employer-not the third-party contract provider-will be responsible for paying the ensuing tax assessment. Since we have educated the industry about these schemes for several years, it is not uncommon for negligence, intentional disregard, and/or fraud penalties to be added, which can be a significant cost.

Employers/Business Owners: If you are approached by a third-party contract provider with a sales pitch, you should be very careful. If you are thinking of converting your drivers to ICs, you should consult a qualified tax professional who does not have a vested interest in promoting these schemes. The EDD has not approved or endorsed any such plan and considers them to be in conflict with California payroll tax law. For more information, you may call our Taxpayer Assistance Center toll-free at (888) 745-3886 or visit your nearest Employment Tax Office. You may also request a ruling by completing a Determination of Employment Work Status for Purposes of State of California Employment Taxes and Personal Income Tax Withholding (DE 1870, (http://158.96.229.222/pdf_pub_ctr/de1870.pdf). It is EDD's policy not to initiate an audit or investigation based upon a DE 1870. However, if an audit or other investigation is already in process, filing this questionnaire will not stop the audit.

Tax Professionals/Business Owners: Help us stop fraud and/or these types of schemes. If you think someone is noncompliant or committing fraud, please contact us at:

Compliance Development Operations
3321 Power Inn Drive, Suite 140
Sacramento, CA 95826
(800) 528-1783
Fax: (916) 227-2772
E-mail: ueo@edd.ca.gov

Or on the Web.