Independent Contractor Compliance Blog

The State of California’s interest rates drop.

How does this work?

If you overpay your federal taxes the interest rates due to you are:

• Four (4) percent if you overpaid your taxes
• Three (3) percent in the case if a corporation overpays
• However, the IRS only pays one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000

If you underpay your federal taxes (as in an assessment for misclassified workers) the interest rates you must pay are:

• Four (4) percent of the amount underpaid
• Six (6) percent for large corporate underpayments

Since in today’s environment almost all tax assessments against a corporation would be over $10,000 (the IRS doesn’t usually spend much effort ferreting out smaller amounts), most IRS tax assessments against businesses will carry an interest rate of 6%, compounded daily.

The State of California’s Interest Rate for 2010 Taxes

California’s interest rate for 2009 is 5%, also compounded daily; however, effective 1/1/2010, the rate will drop to 4%. 

The size of the assessment or type of business does not affect California’s rate.  Also, California pays the same rate if it pays out interest as it charges on tax liabilities.  California’s rate will remain unchanged through June 30, when it will be adjusted based upon the prime rate at that time.  California adjusts its interest rate effective in July and January of each year.

It’s the daily compounding…

Both federal and state law provides for interest owed to be compounded daily from the time the tax agency determines the money should have been deposited in the government’s bank account until it is paid. 

Audits are conducted by reviewing the past (the statutory period is three full years, unless intent to evade or fraud is involved then there is no statute of limitations).  Therefore there is always a lengthy time period that interest has already accumulated before the assessment is made and before you have an opportunity to pay.  Neither state nor federal law allows for interest to be waived.

This is a silent killer for businesses that receive an assessment for misclassifying workers.  I’ve seen interest alone double liabilities owed because a company made an error in classifying their workers.  This cost factor significantly raises the stakes in properly classifying your consultants and contractors.