Independent Contractor Compliance Blog - by Collabrus™

Over the years, I’ve found some employers are unaware of specific conformity laws intended to protect their company, but due to confusion around reporting, these laws caused more harm than help. So I thought I’d take a moment to share an example with you. You can thank me later.

Essentially, there are federal “conformity laws” for multi-state workers that apply to all states.  These laws are designed to protect your company from withholding and paying taxes twice for the same employee under the same wages in two different states.  However, I’ve seen two common situations where employers try to simplify their reporting.  In the first situation, an employer will declare all workers (in and out of state) as having worked in only one state.  Guess which one? The state of their home office or headquarters.  The other situation I’ve seen, again to simplify reporting, is where a company will classify all out of state workers as ICs and in-state workers as employees. 

Doing either of these can cause trouble later on.

When this causes a problem

Usually this situation doesn’t become an issue until the worker, who resides in and performs most of, or substantially all of, his or her work in a different state, becomes unemployed and files a claim.  The Department of Employment in the home state of the worker, where he will typically file his claim, looks into their data base and finds no wages reported for him.  They then discover he had been working for a company headquartered in a different state.

That’s when the audit reciprocal agreement program kicks in

For example, let’s say a company headquartered in California is employing the services of a worker in Nevada.  This worker becomes unemployed and files a claim in Nevada. Nevada’s Department of Employment will contact California’s Employment Development Department and ask the CA EDD to investigate the proper benefit and tax reporting status for this worker.

If the company headquartered in California has been handling the worker as an independent contractor, the reciprocal agreement allows for Nevada to ask California EDD to determine:

• If the worker was properly classified as an IC
• If the worker was misclassified as an IC, in which state he or she should be covered as an employee
• If improperly reported to Nevada (for example) and determine the necessary wage data for Nevada to make tax assessment for back taxes and pay benefits

EDD will use the federal rules to decide which state the worker should be reported. 

If a tax assessment is levied from Nevada (for example) there are also provisions for California to assist in collecting the taxes, penalties and interest if necessary.

For the company’s sake, I wish I could say this is where they stop

However, the EDD doesn’t like to go out and investigate or audit one state, in this case Nevada. When the EDD auditor is out in the field he or she will typically conduct a California tax audit, too.  Double Jeopardy.