California Forms for Independent Contractors and New Employees
Now that 2005 is "in the books," your accounting professionals at Biesheuvel Scarpa & Co. are looking forward to helping you navigate your way through a successful 2006. This month's topic is the reporting of new employees and independent contractors to California's Employment Development Department.
While federal forms reporting income to independent contractors (Form 1096) and employees (W3) have one annual due-date (February 28 and January 31, respectively), the state of California requires you to submit forms identifying contractors and employees within 20 days of their being hired.
DE 542 (Report of independent contractors): If your business is required to file a Federal Form 1099-MISC for services performed by an independent contractor, you must also submit DE 542 to the EDD within 20 days of either making payments of $600.00 or more, OR entering into a contract for $600.00 or more with the contractor in any calendar year, whichever is earlier.
An independent contractor is an individual who is not an employee of the business and who receives compensation or executes a contract for services performed for that business either in or outside of California.
Here's a guideline to help you determine which contractors will require a 1099-MISC, and for whom you will need to submit the DE 542 within the 20-day window:
- Each person to whom you have paid at least $600 in rents or services (including parts and materials), prizes and awards, other income payments, and medical and health care payments.
- You only have to report payments made in the course of your trade or business. Personal payments are not reportable.
- A 1099-MISC is NOT required for payments made for merchandise, telegrams, telephone, freight, storage, and similar items.
- A 1099-MISC is generally NOT required for payments made to corporations. Exceptions to this include medical and health care payments and attorneys' fees; doctors and attorneys receive 1099-MISC even if they are incorporated.
- If you determine that a contractor will require a 1099-MISC at year's end, you will need to provide the contractor's full name, social security number, address, the date payments equaled $600 or more (or the date the contract began), the amount of the contract (if there is one) and its expiration date.
DE 34 (Report of New Employee): According to EDD, "Federal law requires all employers to report to EDD within 20 days of start of work all employees who are newly hired or rehired. An individual is considered a new hire on the first day in which he/she performs services for wages. An individual is considered a rehire if the employer/employee relationship has ended and the returning individual is required to submit a W-4 form to the employer."
Federal Form W-9: Federal law requires that a form W-9 be completed at the time an independent contractor is hired. This is to ensure that you are given correct information prior to any payment being made. Give this form to the contractor to complete and keep it for your records.
FYI: The purpose of both forms DE 542 and DE34 is to assist state and county agencies in locating parents who are delinquent in their child support obligations, but submitting these forms in a timely manner can serve another purpose as well: by keeping a copy of the DE 542, you will avoid the year-end hassle of tracking down the contractors' addresses and tax ID numbers you need to complete the 1099-MISC.
Article by: Jeff MacAskill , Senior Accountant, InConcert Financial Group.