Race Against the Clock.

BEGINNING JAN. 1, 2001, businesses across the state will race against the clock to meet new EDD reporting requirements for independent contractors.

Any business or government entity that is required to file a Form 1090-MISC for independent contractors services (service-recipients) will be required to report all independent contractors within 20 days of either making payments totalling $600 or entering into a contract for $600 or more with an independent contractor, whichever is earlier. This includes anyone subject to the California Revenue and Taxation Code inside or outside of the state.

For example, a California-based company with a small office in Florida that hires a gardener, would need to file a report (Form DE 542) on that gardener. Likewise, a Florida-based company that hires a California gardener for its Sacramento office also would have to file a report.

Reports do not have to be filed if the independent contractor is a partnership, LLC or general corporation.

PAPERWORK

These new requirements are designed to help collect child support from delinquent parents.

Many businesses consider the requirements burdensome since they cannot be filed in conjunction with 1099s. To ease this burden somewhat, EDD will allow businesses to report independent contractors in advance of actually making payments or entering into contracts.

Therefore, as businesses capture preliminary 1099 data for 2000 reporting, they will be able to isolate ongoing contracts for 2001. In turn, businesses can submit Form DE 542 for ongoing contracts in advance and ease some of the paperwork burden. Also, EDD has revised Form DE 542 to include a check-off box that indicates an ongoing contract, so each individual does not have to be reported each year.

ENFORCEMENT

Once Form DE 542 has been filed, it will be matched with Department of Justice records. Matches will be forwarded to local child support agencies, and if appropriate, trigger a notice for wage withholding.

While EDD is responsible for enforcement of these new requirements, FTB is responsible for collecting garnishments. Pending legislation (Assembly Bill 1358) will establish a penalty of $24 for omitted or late filed reports. Additionally, if a business does not report an independent contractor who owes delinquent child support, a custodial parent can file a suit in small claims court.

INDUSTRY MEMBERS

If you work in industry and hire independent contractors, you'll want to begin training and dealing with staffing issues for the DE 542 reporting process as soon as possible. You can supplement in-house training with visits to EDD offices or by attending EDD conferences. Additionally, you'll want to schedule time with your company's management to discuss the new requirements and their implications.

PUBLIC PRACTICE MEMBERS

Similarly, CPAs in public practice will want to advise their clients of the new requirements early on. You may want to provide a copy of Form DE 542 to your clients, along with information on how to obtain additional forms and information. You'll want to point out that this new requirement is not something your clients can simply address on a monthly basis due to the 20-day filing deadline. Interestingly, for those CPAs who do only tax work for small business clients, you may be the only independent contractor that your client will need to report.

As a liability protection measure, you'll also want to clearly state your obligation in this process as your client's CPA. CAMICO expects to provide recommended engagement letter language on this issue later this year.

AVAILABLE SUPPORT

EDD has designed forms and brochures to answer questions on independent contractor reporting. The new reporting form, fact sheet, brochure and frequently asked questions are available to the public on the EDD Web site at http://www.edd.ca.gov. Hotline help is available at [phone]. Web support is available at http://www.edd.ca.gov/txicrfaq.htm.

Heidi Schunke, CPA, M.A., is employed by a Napa-based durable goods manufacturer. She is an independent contractor and previously taught as an assistant professor of accounting.

James C. Counts II, CPA, is a Hemet-based sole practitioner. As a member of the state Taxation Committee, he is CalCPA's liaison to the Employment Development Department.