California budget a No Pass. Independent Contractor “Fall Guy”

Mandatory taxation for independent contractors a cure for what ails California? 

Employers required to withhold 3 percent of independent contractor wages to help balance state budget.

California officials are pushing for mandatory withholding of taxes from all wages paid to independent contractors. Governor Schwarzenegger failed to endorse the proposed budget last week due to an unrelated issue but nonetheless the money must start flowing in soon.  Where is it going to come from?  If the state has it’s way it will come in the form of a taxation on a group not accustomed to being subjected to automatic taxation. The announcement and push has many employers baffled and contractors fuming. As the plan increases the number of adopters and continues to gain momentum those likely to be impacted are scrambling to shut it down before it ever launches.  

The California Association of Realtors (CAR) is fired up over the legislation stating it unfairly singles out independent contractors and forces this group to bear the burden of the state’s budget debacle.  However the state claims this shadow workforce is part of the root cause for its shortfall.  The change would generate about $2 billion in one-time funds for the fiscal year 2009-10 and ongoing will generate compliance revenues of more than $130 million per year.

The taxation idea has the support of state Sen. Leland Yee, D-San Francisco/San Mateo but not everyone agrees with Yee’s position on the move.  Assemblyman Jerry Hill, D-San Mateo and Belmonts Chamber of Commerce Governmental Affairs Committee Chairwomen Mary Morrissey Parden called the move “creative accounting” and characterized it as ‘financial shenanigans”.

A move which clearly pierces the employer veil. What once were clear lines of delineation of contractor versus employee are quickly begining to fade…