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socrateaser
socrateaser, Lawyer
Category: California Employment Law
Satisfied Customers: 34634
Experience:  Retired (mostly)
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I am a new business owner in CA and had some knowledge in payroll

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I am a new business owner in CA and had some knowledge in payroll and bookkeeping. I started a business in 2011 and I ran my business all by myself. This year, my business got better and had to hire employees on "seasonal" and "on-call" basis only. I found an online payroll manager and hired my friend as an independent bookkeeper/data entry contractor. Unfortunately, the payroll software that we thought automatically takes care of all the payroll is really not doing it's job. The botXXXXX XXXXXne is.... none of the newly hired employees was reported to EDD. None of the forms or payroll taxes were reported but, the software had been telling us how much payroll taxes are and my bookkeeper is setting that money aside. My problem is, I don't even know if we already acquired an Employer Account number. Also, one of my employees claimed for unemployment from her previous job but, she also reported to EDD that she's working for me on an on-call basis since February of this year, 2013. I have 2 part time part time employees and they both work about 20-30 hours per week. 1 of them started working in April, 1 in August and other 2 were just recently. I've also hired about 3 or for "Seasonal employees". I pay them all $8/hour. I just need to know what to do and where to start. I know I'm in trouble but I'm hoping that do not have to pay an outrageous penalties with EDD and IRS.
Submitted: 1 year ago.
Category: California Employment Law
Expert:  socrateaser replied 1 year ago.
Hello,

You are talking exclusively about the EDD in your question. Does this mean that you have been timely remitting payroll taxes to the IRS?

Customer: replied 1 year ago.
That's what I thought my payroll software was doing for me but nothing was getting deducted from my bank account and that's how I found out that nothing was being reported to the IRS.
Expert:  socrateaser replied 1 year ago.

Okay, you really have one of two choices:

1. You can get together and tell your employees that you want to start their first date of employment as of Oct 14, 2013, and that for their work done prior to that date, you will turnover all of the money set aside for their payroll taxes to them, and give them a 1099-MIsc at year end for the gross amount of money, and they will have to report their taxes as self employed, Schedule C employees, for that period of time.

Then, you'll have to cross your fingers and hope that neither EDD nor Uncle Sam comes looking, and that none of the employees decide to file a claim that you were misclassifying them as independent contractors during that time period. Definitely risky, but if you succeed, then you won't have any penalties.

2. You can contact EDD and the IRS and explain your error, and then let both agencies impose whatever penalities are required by law. You may get stuck with an additional payment plan to pay off the penalty amounts -- but, there is nothing in the law here that protects you for making an honest mistake. Penalties will be imposed for failure to procure workers comp insurance (if you did not), unemployment insurance contributions, State Disability Insurance payments, and failure to remit FICA (Social Security), FUTA, and Medicare payments to the U.S. Treasury.

I can't calculate the penalties. You would need a CPA to handle that task. Though, it really doesn't matter, because if you decide to choose option #2, the penalties will be what they are, and you'll just have to swallow them.

There actually is a "door number three," now that I think about it. You could close the business right now, and tell your employees, that you will give them all of the money set aside if they agree not to report you to the government -- and that this was all just a giant mistake on your part. You'll be risking that someone files for unemployment compensation -- if they do, you're SOL.

The point here is that unless you choose option #2, you are at the mercy of the employees and their respective understanding of tax law, and the penalties you will suffer if they decide to make you the enemy. Whereas, if they were each to simply take the money, pay their taxes and move on to new employment, you could potentially escape unscathed.

Please let me know if my answer is helpful or if I can provide further clarification or assistance.

Customer: replied 1 year ago.
Just one last question, I can gather my employees and do what your #1 or #3 suggestion but one of my employees claimed unemployment from her previous employer and reported that she works for me on an "on-call" basis, she didn't clarify with them if she was a contractor or not tho. Do you think she can just tell them that she works for me as a contractor since she really just come to my store to clean?
Expert:  socrateaser replied 1 year ago.
Someone who just cleans your store, holds themselves out to the public as doing commercial janitorial services, and assuming that you are not in the janitorial business, could very easily qualify as an independent contractor -- even in California, where it's extremely difficult to be qualified as such.

The difficulty with minimum wage employees is that they frequently are not business savvy enough to know that they are saying something when they answer questions asked by government agents that can sink your ship.

No way to predict what could happen here, if the employee puts her "foot in it," if you take my meaning.

Hope this helps.
Customer: replied 1 year ago.
She just texted me and she did mention that she told them she is an employee on an on-call basis. So then, I believe the only option here is to claim her as an employee and claim everybody else as an independent contractor then? And for the ones who only worked one day, can I just not report them since they earned under $500?
Expert:  socrateaser replied 1 year ago.

So then, I believe the only option here is to claim her as an employee and claim everybody else as an independent contractor then?

A: Definitely an option.

And for the ones who only worked one day, can I just not report them since they earned under $500?

A: I'm not sure where you're getting this $500 number, but it does not apply to any law of which I'm aware (except for unlicensed "handyman" constrution workers, where labor and materials are less than $500 for any individual job.

Read EDD Guide DE-44, beginning on page 16 to determine reporting requirements for a particular type of employee. Though, it could be if someone only worked for you on a single day, they may be delighted to get some unreported cash.

Just remember the immortal words of late President Richard M. Nixon: "Don't get caught!"

 

Seriously, though, I can't encourage you to violate the law. I can tell you what's likely to happen if you don't follow the law, but you have to make your choices as to what you will actually do.

Hope this helps.

socrateaser, Lawyer
Satisfied Customers: 34634
Experience: Retired (mostly)
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socrateaser
socrateaser
California Employment Lawyer
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Retired (mostly)