Other Independent Contractor Reporting Requirements

I mentioned in the 1099 posting that "if you are based in California and have a 1099-MISC reporting requirement, you were probably also required to submit a DE-542 within 20 days of paying over $600 or entering into a contract to pay over $600." Apparently that was a surprise to some, so I thought I’d talk a little more about new hire reporting as it affects independent contractors. If you are based in California, you may also want to see the information about California’s nonresident withholding requirements below.

History: Since 1997, the Personal Responsibility and Work Opportunity Reconciliation Act has required all employers covered under unemployment insurance law to report new hires to their state’s new hire registry within 20 days. While the goal of the requirement was to collect delinquent child support payments more effectively, states can also use the information to catch fraudulent unemployment, worker’s compensation and welfare claims. States have the option of imposing penalties up to $25 for failing to report new hires, and $500 if the failure is due to a conspiracy between the new hire and the reporting employer.

The above sets minimum requirements for the states new hire reporting. States can require that more reporting or impose shorter deadlines – you’ll notice on the chart that some states require reporting within as little as 7 days. Multistate employers can choose to report all of their new hires to one of the states in which they do business, but will be subject to that state’s reporting requirements – e.g. you probably wouldn’t choose Alabama with it's 7 day deadline :-).

Today: California isn’t the only state to require reporting of independent contractors as well as employees - you can see a list of states requiring independent contractor reporting here.

NOTE: Many folks have tried to save payroll taxes by treating their employees as independent contractors. Having the IRS or state employment agency decide after the fact that independent contractors were actually employees can be an expensive mistake, possibly costing not only back taxes, but penalties and interest as well as employee benefits like retirement or profit sharing.

The IRS looks at the degree of control and independence the contractor has – contrary to some of the bad advice my clients have received (before they were my clients), merely calling them contractors (or having them sign statements that they understand they are contractors) while treating them as employees won’t stand up under examination. Unfortunately, there is no single “bright line” test that separates contractors from employees. If you are not certain how to treat a service provider, you can use IRS form SS-8 to request a determination – be advised that it will take them about six months to get back to you. You may also want to check with your tax preparer, the IRS or your state employment department for more information (and your state may also offer advanced determination form - California has form DE-38).