Tax Problem Attorney Blog

Articles Posted in California Payroll Tax Problems

In a recent worker classification ruling SS8 2010030006 the IRS held that a part-time bookkeeper/general office worker was an employee and not an independent contractor. Generally the existence of an independent contractor relationship is based upon a 20 factor common law test set forth in Rev. Rul. 87-41, 1987-1 CB 298. Some of the factors the IRS took into account were:

The worker performed services at the payor’s place of business as well as her own home The payer provided all office supplies including telephone, fax machine etc., although the worker provided her own computer, and accounting software.
The bookkeeper was paid hourly The worker did not receive any benefits
The worker provided services for a period of about 2 years.
The payer’s had obtained a state ruling that the worker was an independent contractor.
The payer and the worker had an oral agreement whereby the worker agreed to independent contractor status The worker was trained by the payer on some of its proprietary software.
The worker did not hold herself out as being in an independent business.

As a tax attorney who has been through many payroll tax audits I know it can be difficult to prove that a worker is an independent contractor to the satisfaction of the Internal Revenue Service or the California Employment Development Department (EDD).

Nevertheless payers who are subject to a payroll tax audit have a variety of defenses including the so-called safe harbor provisions of Section 530 of the Revenue Act of 1978. This underused provision of the law allows for workers who fail the 20 factor common law test be treated as independent contractors provided the following requirements are met:

1. For federal employment tax purposes the payer never treated the individual as an employee for any period, nor did it ever treat workers holding substantially similar positions as employees;

2. All federal tax returns (including Form 1099) are filed on a basis consistent with the taxpayer’s treatment of the individual as not being an employee; and
3. A reasonable basis existed for classifying the individual as an independent contractor. Reasonable basis includes:

a. Reliance on judicial precedent or revenue ruling;
b. Previous IRS tax audit;
c. Long-standing recognized practice of a significant segment of the industry; or d. Any other reasonable basis.

If your company is contacted by the EDD or the IRS for a payroll tax audit or any other tax problem call the former IRS tax attorneys at Brager Tax Law Group, A PC.

Many business taxpayers fail to pay over payroll taxes to the Internal Revenue Service (“IRS”). By doing so they expose themselves to personal liability pursuant to Internal Revenue Code Section 6672 known as the Trust Fund Recovery Penalty (TFRP). Generally, corporate officers, shareholders and others who have the responsibility for withholding and paying over payroll taxes can be held personally responsible for the trust fund portion of the payroll taxes if they willfully fail to pay these amounts to the IRS. Sometimes business owners who are undergoing tough financial times are tempted to take this risk. In my experience the thinking is that if a company doesn’t pay its vendors it will be out of business in short order. On the other hand the IRS tends to be slow about insisting on payment, and it can be months or even years in some situations before the IRS gets serious. Based upon this analysis the business owner decides to take a calculated risk, and hope that business picks up before the IRS shows up.

Jack Easterday found out the hard way that the stakes can be very high indeed. Mr. Easterday was convicted of willful failure to pay over employee payroll taxes in violation of Internal Revenue Code Section 7202. Mr. Easterday’s conviction was upheld by the Ninth Circuit Court of Appeals. United States v. Easterday. The extremely scary part of the decision by the Ninth Circuit was that the Court held that Easterday was guilty even though he may have been able to prove that the company didn’t have sufficient funds to pay the payroll taxes.

If you have payroll tax problems, or any other type of tax problem you can contact the tax lawyers at Brager Tax Law Group.

The California Employment Development Department (EDD) announced that it will be exchanging payroll tax information with the Internal Revenue Service (IRS) . The EDD is the state agency which includes in its duties making sure that employers withhold and payover state payroll taxes. The EDD programs include payroll tax audits of business owners to make sure that all workers who have been treated as independent contractors are truly independent contractors, and not employees. In determining whether workers are properly classified the EDD sometimes relies on the 20 factor test set forth by the IRS in Rev. Proc. 87-41. It also relies on a 9 factor test set forth in the California Supreme Court case set forth in Tieberg v. California Unemployment Insurance Appeals Board (1970), 2 Cal. 3d 943 P. 2d 975; 88 Cal. Rptr. 175. The factors listed are:

1) Whether or not the one employed is engaged in a distinct occupation or business;

(2) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal or by a specialist without supervision;

(3) The skill required in the particular occupation;

(4) Whether the employer or the worker supplies the instrumentalities, tools, and place of work for the person doing the work;

(5) The length of time for which the person is employed;

(6) The method of payment, whether by the time or by the job;

(7) Whether or not the work is part of the regular business of the employer;

(8) Whether or not the parties believe they are creating an employer-employee relationship; and

(9) Whether the principal is or is not in business.

Although the EDD has supplied information from its payroll tax audits to the IRS for many years, the IRS has not been particularly efficent at using this information to start its own payroll tax audits. Whether or not this new agreement foreshadows an increased degree of enforcement by the IRS is unknown. However, it underscores the risk of not contesting an EDD payroll tax audit. For more information about filing an appeal of an EDD payroll tax audit see our article

If your company has been contacted the EDD for a California payroll tax audit or has other California payroll tax problems contact the California tax lawyers at Brager Tax Law Group, a P.C.