Reporting Requirements When Hiring Independent Contractors

by BPW | March 3, 2016

clips-forms-freeimages_1194434-_horizontal

Does your business hire independent contractors? If so, are you filing all that you need to with the State of California to avoid penalties? You probably already know that you must file a Form 1099-MISC with the IRS for services performed by an independent contractor, but have you filed form DE 542 Report of Independent Contractor(s) with the California Employment Development Department (EDD)?

You may be wondering the purpose of the DE 542 when the IRS already receives a 1099-MISC as a record of wages. One of the main reasons for filing this form with the EDD is that the information is then used by the state to locate parents who are delinquent in child support.

According to the EDD’s website, employers are required to file a form DE 542 if they hire an independent contractor and the statements below apply:

  • You are required to file a Form 1099-MISC for the services performed by the independent contractor.
  • You pay the independent contractor $600 or more OR enter into a contract for $600 or more.
  • The independent contractor is an individual or sole proprietorship.

Additionally, form DE 542 must be filed within 20 days of making payments of $600 or more, or of entering into the contract, in any calendar year. If the independent contractor is a corporation, general partnership, limited liability partnership or a limited liability company, then the business is not required to file the report.

This is not new legislation, but in the past the EDD has not strictly enforced it. However, due to the lack of reporting, the state has recently authorized the EDD to begin to penalize non-reporting employers. If employers do not file the proper forms with the EDD, it can result in penalties being assessed to the business. If the report is late the EDD may impose a penalty of $24 for each failure to report. There is also the potential for further penalties should the EDD find out that the failure to report was due to a conspiracy between the business and the independent contractor.

Additionally, there is discussion on whether or not the business could be held liable by the collector of child support if the business does not file the appropriate forms. However, at this time, nothing has been formalized on the whether or not the business would be liable in that circumstance.

If you currently employ independent contractors or are considering hiring one and have any questions about what forms you should be filing, please feel free to contact me at (805) 963-7811 or dlewis@bpw.com.