Employment Tax Employment Tax LawsLaws

LAUSD Small LAUSD Small Business Boot Business Boot

CampCamp

v15a

PresentersPresentersJimmy Wong

Employment Development Department (EDD)Taxpayer Assistance Center

1-888-745-3886 / www.edd.ca.gov

Anthony SykesInternal Revenue Service (IRS)

Leveraged Partner

1-800-829-4933 / www.irs.gov

AgendaAgenda• Employee or Independent

Contractor• Reporting Requirements for

Independent Contractors• Employer Responsibilities• Reporting and Depositing

Requirements

EmployeeEmployeeoror

IndependentIndependentContractorContractor

Misclassification ExampleMisclassification Example

One worker, earning $20,000 for one year

Employer misclassifies worker as independent

contractor.

Employer correctly classifies worker as

employee.

UI (3.4 percent)**New employer rate

$238 $238

ETT (0.1 percent) $7 $7

SDI (0.9 percent) $180

PIT (6.0 percent) $1,200

Total due for one year

$1625****Plus penalty and interest

$245

Types of WorkersTypes of Workers

EmployeesCommon LawStatutoryExempt

Independent Contractors

Employee and Independent Employee and Independent ContractorContractor

Common Law Employee:

An individual who performs services for you and is subject to your control regarding what will be done AND how it will be done.

Independent Contractor:

An individual who performs services for you BUT you control only the result of the work.

Common Law FactorsCommon Law FactorsIRS - Categories

of Evidence Secondary Factors:

Supervision

Extent of actual control

Skill level

Distinct trade or occupation

Method of payment

Tools and place of work

Profit/loss

Length of time

Services benefit the principal

Regular part of business

Belief of the parties

Behavioral Control

Relationship of Parties

FinancialControl

EDD - Primary FactorRight of Direction and Control

Reasons to Properly Classify Reasons to Properly Classify WorkersWorkers

• Avoid reclassification audits and investigations by the EDD, IRS, and/or Department of Industrial Relations due to:

Worker claims – unemployment/injury.Worker informants.Competitor informants.

• Prevent additional taxes, penalties, and interest.

Voluntary Classification Voluntary Classification Settlement ProgramSettlement Program

• Optional program to reclassify workers.• Applies to future tax periods.• Must meet eligibility requirements.• Apply by filing Application for Voluntary

Classification Settlement Program (VCSP), Form 8952

• Must enter into a closing agreement.

IRS ResourcesIRS Resources• Business and Specialty Tax Hotline:

888-829-4933

• Visit www.irs.govSelect “Information For…” in upper-right corner.Choose “Businesses” from the drop-down

menu.Select “Employment Taxes” in the left

navigation pane.

IRS Resources (continued)IRS Resources (continued)• Independent Contractor or Employee,

Publication 1779• Employer’s Tax Guide, Publication 15

(Circular E)• Employer’s Supplemental Tax Guide,

Publication 15-A• Determination of Worker Status for

Purposes of Federal Employment Taxes and Income Tax Withholding, Form SS-8

Additional ResourcesAdditional Resources

• California Employer’s Guide (DE 44)

• Information Sheet: Employment (DE 231)

• Employment Determination Guide (DE 38)

• Determination of Employment Work Status for Purposes of State of California Employment Taxes and Personal Income Tax Withholding (DE 1870)

Employee or Independent Contractor Course at:www.edd.ca.gov/Payroll_Taxes/Web_Based_Seminars.htm

Reporting Requirements Reporting Requirements for for

Independent Independent ContractorsContractors

Request for Taxpayer Identification Request for Taxpayer Identification and Certification, Form W-9and Certification, Form W-9

Reports: Payee’s correct name. Payee’s Taxpayer Identification

Number (TIN).

Backup Withholding Backup Withholding RequirementsRequirements

• Withhold 28 percent of income if:Payee does not provide TIN.Payee provides incorrect TIN.IRS notifies payer of incorrect TIN.

• Withholding time frames:Begin with first payment over $600.Until payee provides correct TIN.

TIN Matching ProgramTIN Matching Program

• Benefits:Match payee name with Form W-9Match TIN with IRS records.Decrease backup withholding and

penalty notices.Reduce the error rate in TIN validation.

• IRS e-Services verification available.

California Backup Withholding California Backup Withholding RequirementsRequirements

If required to remit federal backup withholding to IRS, withhold 7 percent of income.

Remit to Franchise Tax Board:www.ftb.ca.gov/individuals/WSC/Backup_Withholding.shtml

Report of Independent Report of Independent Contractor(s) (DE 542)Contractor(s) (DE 542)

Report within 20 days if you are making payments totaling more than $600 or entering into a contract of $600 or more, whichever occurs earlier.File timely to avoid penalty and interest.Locate parents who are delinquent in their child support obligations.

Form 1099-MISC Filing Form 1099-MISC Filing RequirementRequirement

• Report payments of $500 or more paid in the course of your trade or business to non-employees annually.

• Report payments of at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.

• Provide required copies timey to:Payees by January 31.IRS by last day of February.

• Exception awareness.

Potential PenaltiesPotential Penalties• Failure to file correct information

returns by due date.• Trust fund

Imposed when taxes withheld are not sent to IRS.

100 percent of taxes, for taxes not sent to IRS.

Potential backup withholding for payer.

Employer Employer ResponsibilitiesResponsibilities

Employer’s Federal Employer’s Federal RequirementsRequirements

• Obtain federal Employer Identification Number with the Application for Employer Identification Number, Form SS-4

• Complete federal forms:

Employee’s Withholding Allowance Certificate, Form W-4

Employment Eligibility Verification, Form I-9

• Notify the IRS of address change.

Employer’s State Employer’s State RequirementsRequirements

When Hiring New When Hiring New EmployeesEmployees

• Obtain an Employee’s Withholding Allowance Certificate (DE 4) if status/allowance claimed differ from Form W-4.

• Submit a Report of New Employee(s) (DE 34).

Employee Notification Employee Notification RequirementsRequirements

• Notice to Employees (DE 35)• Paid Family Leave (DE 2511)• State Disability Insurance Provisions

(DE 2515)• For Your Benefit: California’s Programs for

the Unemployed (DE 2320)• Written separation notice to employees.• Information on Earned Income Tax Credit.

Posting RequirementsPosting Requirements

State and federal regulations require employers to display various posters and notices to inform their employees of certain laws and regulations pertaining to employment and working conditions.

RecordkeepingRecordkeeping• Maintain wage, earning, deduction,

and withholding records on each employee.

• Provide earning statements to each employee, each payday.

• Retain employee records and returns for at least four years.

Reporting Reporting and and

Depositing Depositing RequirementRequirement

ss

2015 Federal Payroll Taxes2015 Federal Payroll Taxes

Employer pays:• Federal Unemployment Tax Act (FUTA): 6

percent for the first $7,000 paid to each employee as wages during the year.

• Federal Insurance Contributions Act (FICA) Social Security: 6.2 percent of the first $118,500 (wage base limit).

• FICA Medicare: 1.45 percent on all wages.

2015 Federal Payroll Taxes 2015 Federal Payroll Taxes (continued)(continued)

Employee pays:

• FICA Social Security: 6.2 percent on the first $118,500 (age base limit).

• FICA Medicare: 1/45 percent on all wages.

• Federal Income Tax: Refer to Pub 15

State Payroll TaxesState Payroll Taxes

Employer pays:• Unemployment Insurance (UI)• Employment Training Tax (ETT)

Employee pays:• State Disability Insurance (SDI)• Personal Income Tax (PIT)

Electronic Federal Tax Electronic Federal Tax Payment SystemPayment System

• MethodsOnline: www.eftps.govCall toll-free 800-555-4477

• No cost.• Available 24 hours a day, 7 days a week.• Taxpayers guided through process.• Third-party deposit verification.

State Payroll Tax Deposit State Payroll Tax Deposit MethodsMethods

• e-Services for Business• Electronic Funds Transfer• Payroll Tax Deposit (DE 88)• Credit Card (phone or

internet)

State Payroll Tax Reporting State Payroll Tax Reporting FormsForms

Payroll Tax Deposit (DE 88)

Quarterly Contribution and Report of Wages (DE 9)

Quarterly Contribution and Report of Wages (Continuation) (DE 9C)

Forms and Due Dates – DE 9/DE Forms and Due Dates – DE 9/DE 9C9C

First Quarter (Jan. - March) due April 30

Second Quarter (April - June) due July 31

Third Quarter (July - Sept.) due Oct. 31

Fourth Quarter (Oct. - Dec.) due Jan. 31

Correcting a Prior DE 9 or DE Correcting a Prior DE 9 or DE 9C9C

Correct form online via e-Services for Business

Complete and mail a Quarterly Contribution and Wage Adjustment Form (DE 9ADJ)

Refer to the Instructions for Completing the Quarterly Contribution and Wage Adjustment Form (DE 9ADJ-I)

Federal Payroll Tax Reporting Federal Payroll Tax Reporting FormsForms

Employer’s Quarterly Federal Tax Return,

Form 941

Employer’s Annual Federal Unemployment (FUTA) Tax Return, Form 940

Multi-State Employer and Credit Reduction Information, Schedule A (Form 940)

Employer’s Annual Federal Tax Return, Form 944

Forms 941 and 940 Due DatesForms 941 and 940 Due Dates

Form 941:

First Quarter (Jan. - March) due April 30

Second Quarter (April - June) due July 31

Third Quarter (July - Sept.) due Oct. 31

Fourth Quarter (Oct. - Dec.) due Jan. 31

Form 940 (Jan. – Dec.) due Jan. 31

Federal Payroll Tax Reporting Federal Payroll Tax Reporting Forms (continued)Forms (continued)

Wage and Tax Statement, Form W-2

Transmittal of Wage and Tax Statements, Form W-3

Forms W-2 and W-3 Due Forms W-2 and W-3 Due DatesDates

• Form W-2 to employees by January 31.

• Form W-3 and Forms W-2 to Social Security Administration by last day of February.– May be sent by March 31 if filing electronically.

Correcting Employment Tax Correcting Employment Tax FormsForms

• Multi-purpose “X” forms to correct previously filed employment tax return:Make adjustments.Claim refunds.Claim abatements.

• Each stand-alone form corresponds to and relates line-by-line with employment tax return being corrected.

Penalty and Interest Penalty and Interest PreventionPrevention

• Classify workers properly.• File all documents and returns timely.• Make all payments timely and in full.• Use electronic filing and payment

methods to reduce errors.• Respond timely to all correspondence.

California Tax Service California Tax Service CenterCenter

www.taxes.ca.govwww.taxes.ca.gov

IRSIRSwww.irs.govwww.irs.gov800-829-4933800-829-4933

FTBFTBwww.ftb.ca.govwww.ftb.ca.gov800-852-5711800-852-5711

BOEBOEwww.boe.ca.govwww.boe.ca.gov800-400-7115800-400-7115

EDDEDDwww.edd.ca.govwww.edd.ca.gov800-745-3886800-745-3886

Thank You.Thank You.

Questions?Questions?