INDEPENDENT CONTRACTOR REPORTING REQUIREMENTS & TESTS
California Business Owners HAVE to report independent contractors.. Whenever a businessman enters into a written or verbal contract for $600 or more, OR pays $600 or more where a 1099 should be reported at year-end, the EDD must receive within 20 days Form DE 542 Report of Independent Contractors. This is used to enforce child support obligations. It requires the social security number of every entity that requires a 1099. You should have received notice from the EDD. This is required every year for every independent contractor, starting January 1 each and every year! If you do not have any employees, you must still file the Form using your social security and Federal Identification numbers. Be sure to get a completed and signed Form W-9 BEFORE any independent contractor is allowed to START work! And, also get their social security number (even though it isn't required per W-9 form instructions). It is required by California.
If the IRS attacks independent contractor status and tries to call individuals employees some relief is afforded. For your information I have included tests that the IRS uses in granting relief:
Relief is granted if both of the following are satisfied:
• ...Reporting Consistency. All federal tax returns including 1099's required to be filed have been filed on the basis claimed for the individual.
• ...Substantive Consistency. Taxpayer hasn't treated any other individual holding a similar position as an employee. WATCH OUT FOR THIS!!
Three safe havens are available for finding a reasonable basis for NOT treating an individual as an employee
• ...Reasonable Evidence on judicial proceedings, published rulings, technical advice, or a letter ruling from the IRS.
• ...Past IRS Audit that didn't disagree with taxpayer's position.
• ...Long-standing practice of the industry in which the individual was engaged.
Material Copyright © 2001 James E Reynolds CPA