Tax Cheats Loophole

If State Senator. Alex Padilla has his way all California employers will be required to report all IC's at the time a work agreement is signed. Senate Bill 1490 would direct the EDD to develop forms that would notify the person that he or she has been hired as an independent contractor .

According to Padilla willful worker misclassification to save tax money and reduce paperwork is helping to fuel the creation of an uneven playing field and a competitive advantage for those who do color outside the lines. To help combat the problem Padilla introduced this bill with the support of the California Labor Federation AFL-CIO. CA employers may be on the hook to open the audit door simply by complying with the law and taking the government up on its offer to "help" employers determine if workers are properly classified.

Some business owners may embrace the states offer but other employers are leery. One small business owner who was audited a number of years ago and had to prove to the state auditor that is coffee service and insurance carrier were not legal employees is not happy. Employers are not convinced this law is the final solution to the problem.

Employer reporting requirements are the norm in CA but certainly not a fail safe for worker misclassifications.

Most employers who misclassify workers do so unintentionally and only learn about the error in an audit or a worker law suit. The average employer is not an expert in worker classifications and may often rely on "industry standard" to help guide them during the hiring process. With the number of auditing agency tests currently used in worker classifications it is nearly impossible for the employer to apply the right test at the right time every time. The infamous IRS 20 questions quiz, often used by many organizations incorrectly, but even if applied accurately this test is only half the battle.

Other auditing agencies such as the EDD, DOL, Franchise Tax Board; Workers' Compensation and the Contractors State Licensing Board have their own tests and are clear as the IRS 20 questions test.

Perhaps the solution here is not another employer reporting requirement in which most employers won't know if it even applies to them. The government may want to consider an alternative tax vehicle that would assign a contractor a flat tax for the state and federal agencies based on services offerings or gross profit dollars

The wins are government agencies get the tax dollars, IC gets the job and the employer is not left wondering when the other shoe will drop.