EDD request for wages

[infocus]

What is the name of your state (only U.S. law)? CA

I am an employer with a contractor who is requesting Unemployment Insurance (UI). I have received an EDD request for wages form.

He was a contractor and then the contract was terminated and he was made an employee. If they determine he was to have been paid as a W4 employee all along, what type of penalties and fees could I be looking at?

How far back would they go in determining which wages are subject to UI in California?

How would they determine if he was an employee or an independent contractor? It would effectively be my word against his.

 

[swalsh411]

I doubt the EDD would make that determination soley on the basis of what the claimant said.

Provide them what they are asking for and also your reasoning for classifying this person as an IC instead of an employee. If you were correct in your classification then those will not be subject wages.

 

[infocus]

If they determine that he was incorrectly classified, what fees would I potentially owe - in other words, what's the worst case scenario? It's not clear how they calculate penalties and fees anywhere on their website. I assume it would be state and federal unemployment tax, social security tax, and some kind of penalty/fee?

Also, I read there is a "safe harbor" which allows employers to use the independent contractor status and avoid penalties (for example, prior practice of treating similar employees as independent contractors). Anyone know about this?

 

[LdiJ]

If they determine that he was incorrectly classified, what fees would I potentially owe - in other words, what's the worst case scenario? It's not clear how they calculate penalties and fees anywhere on their website. I assume it would be state and federal unemployment tax, social security tax, and some kind of penalty/fee?

Also, I read there is a "safe harbor" which allows employers to use the independent contractor status and avoid penalties (for example, prior practice of treating similar employees as independent contractors). Anyone know about this?

I am afraid that the worst case scenario is a pretty significant one. On a federal level you would be subject to employer taxes going back as far as the IRS chooses to audit you, and there is interest (modest) and up to a 100% penalty on the unpaid tax. I don't know what kind of penalties your state imposes, but I suspect they are equally harsh.

Bottom line: Unless you can prove that this "employee" sets his own hours, can subcontract the work to someone else, provides all of his/her own materials and supplies, etc., etc., then you could have a serious problem.

I should add that the IRS has a amnesty program going on right now that would limit the penalties...however that amnesty program only applies if you voluntarily reclassify your workers to employees.

 

[tranquility]

I suggest you get a tax professional or attorney immediately. No one can tell where this will go unless they know your business. At the very least, one of those professionals will NEVER say anything like:

I am an employer with a terminated employee who is requesting Unemployment Insurance (UI).

combined with:

The employee was an independent contractor.

Sheesh. Why would you admit guilt from the start? A couple of things. First, never use words that imply you are an employer or the party is an employee. Those would be admissions that are difficult to unwind. Also, refrain from saying things like "terminated". An independent contractor can't be fired. The contract is completed or breached. (Depending on the facts.)

If they determine that he was incorrectly classified, what fees would I potentially owe - in other words, what's the worst case scenario?

If incorrectly classified, they will check all others who work or have worked at your business and do a similar check. I will assume they are employees because you have giving nothing to indicate they are not. (Your word against theirs? Hardly. There is a big old paper trail for either. If not, employee.) It is not the EDD so much to worry about, but the FTB and the IRS once the EDD makes a determination.

Generally, you will pay the withholding for the employee(s) and a penalty for the late payment. (Including interest.) The state will report the findings to the feds and they will want the same including social security and medicare. Also, there will be the amounts due for SDI and unemployment. (Along with penalties and interest.)

EDD only cares about unemployment so they don't need to go back. The FTB and IRS care about everything but will probably not go back past three years.

I'd say that if you are only talking about a problem with a single employee, you will get out of this for a few thousand. (Unless the employee is highly paid.) If more, it could ruin your business.

Get professional representation immediately.

 

[eerelations]

Posting history, folks. OP is the person who has no knowledge whatsoever of employment law/good management practices and who has been told over and over and over again here that he needs to hire a good HR Consultant to help him through his kazillion issues. He has consistently refused and is using us as his unpaid consultants. I particularly object to this because I used to be one of those good HR Consultants helping small business owners and I just HATED encountering cheapskates like the OP.

OP if you're too cheap to pay for the knowledge and tools you need to run a business legally and approprately, then you shouldn't be running a business at all. Period.

 

[infocus]

Per the comment of tranquility, who was very kind and helpful, I have contacted my attorney and he is on the case. I have also contacted my tax preparer.

No more questions.

Edit: thanks to LdiJ as well.

 

[Stephen1]

IC's can be fired

Also, refrain from saying things like "terminated". An independent contractor can't be fired. The contract is completed or breached. (Depending on the facts.)

While contracts that are tied to fixed tasks (construct a building) or fixed periods (provide certain service for a year) end w/completion or breaching, contracts could also be open ended. An open ended contract such as 'provide bookkeeping services' would continue as long as both sides are satisfied and would end by the termination of the contract. I know that such endings are often referred to as 'firing the [client][contractor]' (when they are unhappy with them) or 'terminating the contract' (when things are more amenable).

 

[Zigner]

An IC's employment can't be terminated (ie: s/he can't be "fired"). All of the rest is slang.

 

[tranquility]

If a person is contracted to do work until he or the contracting party doesn't want the relationship any longer, it would be a very heavy factor against the person being determined an independent contractor. While I have no real argument with Stephen1 as a matter of jargon, within the context of employee/IC determination, it doesn't help.