Independent Contractor Compliance Blog

SACRAMENTO-Last week Governor Arnold Schwarzenegger proposed $4.4 billion in new taxes and a similar amount in spending cuts to deal with California’s worsening fiscal crisis.  He also alluded to bringing in more money through other “revenue generators.”

“We must stop the bleeding…We have a dramatic situation here and it takes dramatic solutions…and immediate action,” Schwarzenegger said as he called the Legislature back into session to deal with the budget shortfall.

One of the agenda items will be shoring up the Unemployment Insurance (UI) Fund.  The state budget people are predicting the UI Fund will be insolvent by January 2009.  Currently, there is discussion of borrowing money from the federal government to continue paying benefits to the unemployed.

Governor Schwarzenegger will cite these facts to support raising taxes and cutting spending when he negotiates with the leaders of the state legislature.

Some Republican votes are needed in the Senate and Assembly to reach the two-thirds majority required for spending plans and tax increases.  State Senator George C. Runner Jr., Republican Caucus Chairman, said “Republicans would be open to considering other ways to generate revenue for the state.”

What are some “other revenue generators?”

Ideas that are being discussed include licensing additional offshore oil drilling to collect fees and to consider selling what Senator Runner said are “billions of dollars of surplus properties” the state currently owns.  He said Republican lawmakers oppose boosting gas taxes or the state’s vehicle licensing fee.

However, another typically popular method (by both parties) to boost state revenues is a more aggressive enforcement of existing tax laws.  Two clichés heard regularly in the halls of state government are “Leveling the Playing Field” and “Increasing Compliance in the Underground Economy.”  State tax agencies tell the legislature that if they have better enforcement tools and more resources they can accomplish both.  This course does not require the two-thirds vote.

There will be a direct effect on IC Compliance.

The more misclassified workers are converted to employees and reported on a W-2, the more money flows into the state.

• Misclassified workers are a source of income for the failing Unemployment Insurance Fund.  The fund does not receive unemployment insurance “contributions” for IC’s, but if a former IC worker applies for UI benefits, he/she will probably receive them.  Why?  The Employment Development Department has a biased towards holding your former IC an employee if he/she applies for UI.  This allows the EDD to pay the individual benefits and provides EDD with an audit lead on the company that “misclassified the worker,” which usually leads to an additional tax assessment.
• Identifying misclassified workers is also a source for increasing the state’s general revenue funds.  The state receives personal income tax withholding deposits each time an employee is paid, keeping a constant flow of money coming into the state’s bank account.  However, Independent Contractors are responsible to make their own estimated tax payments throughout the year.  Both the state and federal governments have cited studies indicating the reporting of income is higher when there is third party withholding and reporting (W-2 reporting).

Therefore, from the state’s point-of-view employees are better than IC’s.  The legislature will hear this when deciding how to bring in more revenue.