Independent Contractor Compliance Blog - by Collabrus™

California’s Governor has called a special session of the lawmakers to address a $10 billion shortfall in budget and in saving the unemployment fund.  This action will effect IC tax enforcement.

SACRAMENTO - Governor Arnold Schwarzenegger, alarmed by the ongoing national and state financial crisis, has called the legislature back into session on November 5^th, one day after the elections, to address the state’s lack of cash flow. According to the Sacramento Bee, October 28, 2008, the governor feels he can not wait for “the new class of lawmakers” being selected in November to resolve this crisis.

In a nutshell:

• California needs more cash.
• Republicans want to cut taxes to lift the economy.  They want to give a variety of tax credits to businesses that hire the unemployed and to those who invest in business growth.
• Democrats want to collect more taxes to fund state spending.  The incoming Senate President Pro Tem Darrell Steinberg stated to the Sacramento Bee that in regards to increasing taxes to meet the budget, “…nothing is off the table…Crisis is opportunity…”
• Both Democrats and Republicans would be willing to make enforcement of tax laws stronger if they believe it would bring in more money.
• In the meantime, the state unemployment rate is currently at 7.7 percent-higher than in many years.
• California is borrowing money to get by “until the cash flow is there…”

It’s customary for California to borrow billions of dollars at the start of the fiscal year to fill its coffers until the usual flood of sales tax receipts comes in after the holidays and income tax receipts arrive in the spring. “California is so large that our short term cash-flow needs exceed the entire budget of some states,” Governor Schwarzenegger said recently.

Another option is to borrow money from the federal government.

The LA Times reported on October 3, 2008, “(Asking the federal government for a loan) is one option on the table,” said Tom Dresslar, a spokesman for Bill Lockyer, California’s State Treasurer. “The treasurer is working with outside financial advisors on a possible emergency plan to sell short-term debt notes to the U.S. government…Lockyer believes that such a plan is both feasible and legal,” Dresslar said.

How does all this effect IC compliance and tax enforcement?

The answer’s in the fine print.  The topics the governor is insisting the legislature come back to address are:

• The state’s mortgage foreclosure crisis
• Saving the states’ Unemployment Insurance fund from going bankrupt
• Fast-tracking previously approved public works projects to bolster jobs
• Creating a new tax commission to recommend changes in the state’s tax structure

Two of these topics are really about taxes:

1. The Unemployment Fund is near bankruptcy. For several years the legislature has resisted, or has been blocked, from raising the taxable limits on the Unemployment Insurance (UI) Tax. I predict the time is near when the $7,000 UI limit will be raised. There are also other proposals lying around that may find life at this time. All are designed to collect more money from employers and make it more difficult to have an IC do your work.

For example, California’s SB 1490, introduced on 2/21/08 and amended on 3/27/08, is currently waiting in California’s Senate Appropriations Committee. It is almost certain this bill will considered, since both parties are willing to increase enforcement if it promises to bring in more money. For more details go back where I covered SB 1490 in July of this year.

I’ve also covered other bills that are awaiting their chance to breathe life. You can find them all in searching the category “IC Legislation” on this blog page.

2. Create a new tax commission:  I think it almost goes without saying, during a time of financial crisis, if you form a tax commission to discuss changes needed in California’s tax law…what will they recommend?

There have been several studies in the past few years by the Employment Development Department (EDD), the Franchise Tax Board (FTB), the Board of Equalization (BOE) and the IRS stating they could collect more tax money if they had stronger tools. Some of these tools are related to employee and Independent Contractor misclassifications. The IC enforcement tools are meant to make it more difficult to classify someone as an IC. They are also designed to increase the penalties if you misclassify your workers (See “IC Legislation” for details).

You may expect many of these proposed laws to raise their little heads in this tax commission and also during the special legislative session being called in November.

All this makes it more important than ever to get your house in order when it comes to IC compliance.  After these measures become law, you’ll be playing catch up…