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Transcript of California State Controller’s Office Webinar: Tax Filing Tips for New Business Owners

The California State Controller’s Office, California Franchise Tax Board and California Employment Development Department teamed up for a tax webinar on Jan. 10, 2013. Watch video of the presentation here and see a PDF here. Read the transcript below:

Moderator Jason Montiel:

Good morning!

Welcome to State Controller John Chiang’s California Strong tax webinar for small businesses.

I’m Jason Montiel with the Controller’s Office and I’ll be your moderator.

Today’s webinar will offer tips to help business owners follow the right steps while tackling tax returns.

This webinar will last about an hour.

The State Controller’s office would like to thank the Franchise Tax Board and Employment Development Department for partnering with us to host this event.

Brenda Voet of the FTB and Jimmy Wong of the EDD will offer lots of good, helpful info.

We’ll kick things off soon with a message from Controller Chiang. But first, I want to take a moment to explain how the control panel on your screen works. In the upper right corner of your screen, you should see a tab. Just click on the arrow on the tab to expand out your control panel.

This slide shows an image of a control panel that is similar to the one on your screen.  On it are the various parts of the control panel and their function. Please use this as a reference to guide your use of the control panel during the presentation.

Notice that your control panel has a dial-in number and access code on it.  If at any point during the presentation you lose our signal, or if you can’t hear the audio, please call the number listed on your screen to hear this webinar over the phone.

At the bottom of your control panel there’s a place for you to type in questions.  Please feel free to type in your questions for our presenters at any time during the webinar. We’ll do our best to answer those questions at the end of the presentation or respond back to you directly.

At this time I’m going to ask everyone joining us online to do us a big favor.  If you have a Twitter account, please log in and send out a tweet right now to let all your followers know about our webinar.  Please use the hashtag: #castrongwebinar when tweeting. We hope you’ll do this to share information with others in your network, and we look forward to reading your tweets!

If at any point you have to leave during today’s webinar or you miss a portion of it, you can catch a replay on our YouTube channel next week or by visiting our California Strong webpage at californiastrong.ca.gov.

Finally, at certain points during our webinar we’re going to invite you to respond to poll questions.  We want to help connect you to the most relevant information to your business. By answering our poll questions, we can get a better sense of what information will be relevant to you and your business for future webinars. 

Let’s start by taking our first poll right now!

Our first question is: How did you hear about today’s webinar? 

You’ll have about 20 seconds to answer this question and we’ll start the time right now. 

We want to know if you heard about our webinar through a Controller’s Office email or his website, the Franchise Tax Board’s TaxNews, a social media post on Twitter or Facebook, a news article or online blog, or other.

We’ll take about another five seconds to receive your answers, so if you’ve not yet entered a response, please do so at this time.

Alright, we’ve closed the poll and we’re now waiting for the results, and it looks like – it looks like a lot of you found out about it, our webinar, through the Controller’s Office email or his website. Thanks so much for sharing your responses.

Now we’re going to start the presentation. Let’s begin with some opening remarks from State Controller John Chiang.

Controller John Chiang:

Good morning and thank you for joining today’s California Strong webinar.

This event is designed to provide you with important tax season information for small business owners.  Some of you may have compliance-related questions or may be planning to start a new business this year. 

Thanks to our experts from the Franchise Tax Board and the Employment Development Department, we have created a webinar that will walk you through some of the important information you need to know this tax season.

Today you’re going to learn more about selecting a tax practitioner, new forms and filing requirements, and how to be in compliance.  We will also be sharing links to important information and resources that can assist you with filing.

Please make sure you take advantage of today’s webinar to get the information you need in order for your business to be successful.

Again, thank you for watching.  It is my pleasure to help keep California Strong.

Moderator Jason Montiel:

Thanks to State Controller John Chiang for providing those opening remarks.  And with that we are ready to turn things over to our first presenter, Brenda Voet from the Franchise Tax Board. 

Brenda has more than 25 years of experience with the Franchise Tax Board. She’s spent 20 years as an auditor, hearing officer and subject matter expert and has a master’s of science degree in taxation.  Some of you may know Brenda from our in-person events we’ve held in various cities across California.  Brenda, thank you so much for presenting today and take it away!

Presenter Brenda Voet:

Jason, thank you so much for letting me do this again. Let me begin with a story.

This is Stick Figure Sam, and last year, he held the grand opening for his business. Like many small business owners, Sam is a sole proprietor. He’s getting ready to file his tax returns, and has many questions, like why should he keep records?

Well, everyone in business must keep records. Good records will help Sam monitor the progress of his business, prepare his financial statements, identify who he paid, why he paid them and how much he paid them, also identify who made payments to Sam’s business, why and how much.

It will also help him keep track of deductible expenses, prepare tax returns, and most importantly support the items he reported on his tax returns.

What records should Sam keep? Well, purchases, sales, and other transactions generate supporting documents. So, Sam should keep records such as invoices, bank deposit slips, canceled checks, cash register tapes, and credit card sales slips.

Sam’s documents should be kept in an orderly fashion in a safe place. For instance, he could organize them in a folder by type of income and expenses and then bundle together by year and then keep them in a file cabinet.

Sam should also keep an eye on mailing during February and March for potential tax documents. For example, interest statements, called Form 1099-INT, for interest, are going to be issued by financial (institutions) and will be mailed out during these months.

Two other things I want to share with you:

  • First, credit card companies will now report to the IRS all sales that were made with credit cards on IRS Form 1099-K, and a copy will be provided to the businesses.
  • And second, while not a tax matter, there’s a new law starting in 2013 that requires employers who pay commissions to their employees to obtain receipts signed by the employees verifying they received a written copy of the agreement, and then the employer must keep copies of signed agreements and the signed receipts.

So how should Sam record his transactions? Sam’s recordkeeping system should include a summary of his business transactions. His books must show his gross income, as well as deductions and credits.

Sam’s recordkeeping systems might include daily summary of cash receipts, monthly summary of cash receipts, check disbursement journal and depreciation worksheets.

For most small businesses, the checkbook is the main source for the entries in the business’ books.

Remember: Use a separate checking account for the business, and do not use it to pay personal expenses. It’s very difficult to be able to identify what was for the business and what was for personal if you’re ever under an audit if you do not maintain separate checking accounts.

Also, to prevent identity theft, get a federal tax identification number so you don’t have to give out your personal Social Security number. It’s real easy to do. You can apply for it online at irs.gov.

So what can Sam deduct? Well, some common business expenses include car, home office, start-up costs, supplies and materials (and) utilities. For more information, please go to irs.gov to get IRS Publication 535, Businesses and Expenses, and IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. Then, go to ftb.ca.gov to get FTB Publication 984, Common Business Expenses for the Business Owner.

Well, who can help Sam with his books and records?

Most small businesses owners have a part-time or full-time bookkeeper, often the business owner or a family member.

A bookkeeper is someone who handles accounts receivable, accounts payable or payroll, and it’s purely mathematical.

An accountant, on the other hand, is someone who sets up the bookkeeping system, monitors it, interprets the results. An accountant also prepares various reports, called financial statements, used to aid in decision making.

Small businesses often use a local accountant who works for many companies on  contract.

The accountant can help Sam set up his books — manual or computerized — and produce weekly or monthly statements and offer interpretation and advice so that Sam can know exactly how his business is doing.

A tax return preparer is someone who prepares tax returns for individuals or small businesses. 

Sam may use different professionals to perform each of these functions, or he could contract with an accountant to perform all of them.

Where can Sam get additional information?

More information about bookkeeping and record keeping is available in IRS Publication 334, Tax Guide for Small Businesses, and IRS Publication 583, Starting a Business and Keeping Records.

For help finding a Tax Return Preparer, the IRS and Franchise Tax Board created FTB Form 982, How to Select an Income Tax Return Preparer.

This handout provides information to help in making informed decisions, knowing what to avoid, and finding information about California return tax preparers.

It’s available online at ftb.ca.gov.

Remember, it’s important to know that no matter who prepares your tax return, you are legally responsible for its accuracy.

So Sam must report all his income and expenses, but how is he going to be doing that?

As a sole proprietor, Sam is his business and the business is Sam.

So, for income tax proposes, Sam will first complete a federal Schedule C, shown here, to report all the income and expenses of his business.

The resulting net profit or loss will then be reported directly on Sam’s personal income tax returns -- federal Form 1040 and state FTB Form 540 -- and the federal Schedule C here will also be attached to each of those returns.

The due date for the business is the same as for Sam’s personal income tax, so April 15th.

Remember that federal and State taxes are pay-as-you-go.

So, self-employed individuals will generally have to make quarterly estimated payments of a portion of the total amount they estimate they will owe for both their income and their self-employment taxes. And they will use these forms: the federal Form 1040-ES and the State FTB Form 540-ES, for Estimated Taxes for Individuals.

The first payment and forms are due by April 15th. The second payment is due June 15th, third Sept. 15th and finally, the fourth estimated payments and forms are due on January 15th of the following year.

What will Sam owe for self-employment tax?

The self-employment tax is a Social Security tax plus Medicare tax for self-employed individuals.

The tax rate for self-employed income earned in calendar year 2012 was 13.3% -- 10.4% for Social Security plus 2.9% for Medicare. 

This increases to 15.3% in 2013. That’s 12.4% for Social Security plus 3.8% for Medicare.

So what should Sam do if he makes payments to an independent contractor of more than $600?

Well, when an independent contractor is hired, and paid more than $600, the total amount paid to them is reported to the IRS using Form 1099-MISC, which stands for miscellaneous.

For example, If Sam used a local bookkeeper, who works for many companies, on a contract basis, Sam is required to issue a Form 1099-Miscellaneous to report the income he paid.

However, before Sam can complete the 1099, he must first obtain correct taxpayer information, such as the taxpayer identification number and certify that he is exempt from having to withhold a portion of the payment and forward it to the IRS and the FTB.

Sam would use federal IRS Form W-9, Request for Taxpayer Identification Number and Certification, and State Form FTB 590, Withholding Exemptions Certificate to do this.

The W-9 and 590 information is then used to complete the Form 1099.

Sam must furnish the 1099 to the independent contractor by January 31st, and file Copy A with the IRS by February 28th.

If an individual or business does not include a taxpayer identification number,  provides an invalid taxpayer identification number, or fails to certify exemption from backup withholding on the W-9 or the 590, then Sam becomes what is called a withholding agent. He must withhold and forward 28% of the payments to the IRS and 7% to the Franchise Tax Board.

A copy of the W-9 and 590 should be kept with Sam’s tax records.

Well if that wasn’t enough, for State tax purposes, it may also be necessary for Sam to withhold a portion of payments totaling $1,500 or more when he makes a payment to an independent contractor who is not from California.  

Sam may also need to withhold on distributions of $1,500 or more on income distributed from California sources, and California sources are items such as rents and royalties from California properties, things that we conducted here, prizes and winnings, income from pass-through entities operating in California, and gains from sale of real property located in California.

For any of these situations Sam would need to withhold and forward 7% of the payment to the Franchise Tax Board, unless Sam got Form FTB 590, or FTB Form 588, Nonresident Withholding Waiver Request, to support that he’s not a withholding agent in this purpose and is not required to withhold the 7% and forward it to the Franchise Tax Board.

You should also know that the State withholding requirement does not apply to wages paid to employees, payments made to purchase goods, supplies and merchandise, and payments for services if they’re performed outside of California.

For more information, please go to IRS’s website and get Form W-9, and then go the FTB’s website at ftb.ca.gov and search for withholding. And that will bring up the Form 588, Form 590, and then Publication 1017, Nonresident Withholding Guidelines, and Form 1076, Withholding on Nonresidents with California Source Income.

So, what if Sam’s business is taking off and he wants to change form of ownership? What are we going to do here?

Well, actually we covered that in a prior webinar that was done by the State Controller, and I could encourage you to go there. But I would also encourage you to go to the IRS’s website and get Publication 583, Starting a Business and Keeping Records. See page 6. And then FTB Form 1123, Guide to Forms of Ownership.

Jason, I think now’s a good time to take a poll question.

Moderator Jason Montiel:

Thank you, Brenda!

Now, let’s take our second poll question. This one will help us as we plan future webinars.

The question is: Which of the following are you most interested in learning more about?

You’ll have about 20 seconds to answer this question and we’ll start the time now. 

The options are: deductions, withholding, estimated tax payments, reporting income and expenses, or none of the above.

We’ll take about another five seconds to receive your answers, so if you have not yet entered a response, please do so now.

Alright, we’ve closed the poll and looking at the results here, it looks like, wow, there’s interest in a lot of areas. Reporting income and expenses is the leader, with deductions at No. 2. There’s also a lot of interest in estimated tax payments.

Thank you very much for that information. It’s really helpful for us.

Remember, during our webinar here you can submit questions for our presenters at any time and we’ll try to answer as many as we can at the end of the webinar.

Now we’re ready to turn things over to our second presenter, Jimmy Wong from the Employment Development Department. 

Jimmy’s experience includes more than 20 years’ experience with the EDD. He spent eight years as a tax auditor, where he conducted audits of businesses to ensure they were in compliance with state payroll tax laws.

As an Employment Tax Consultant for the past 12 years, Jimmy has educated business owners, human resources professionals, and tax professionals on state payroll tax topics.

He holds a bachelor’s degree in business administration/accounting from California State University, Los Angeles.

Jimmy, thanks for joining us!                                                            

Presenter Jimmy Wong:

Thank you, Jason! 

I’m going to cover quite a few things today, so for those of you who do have questions later on, just remember everything that I’m going to talk about today, as far as from EDD, is available on the EDD website at www.edd.ca.gov.  From the main page, just click on payroll taxes and it’ll take you to the payroll taxes section, and that will cover everything that I’m going to talk about today.

OK, so now that Sam decides he wants to hire some help, what should he do? So let’s say business is going well for Sam and he decides he wants to hire some help.  What does he need to know?

Well, let me give you a little background first. The first thing is Sam needs to understand the difference between hiring an employee and using what we call an independent contractor, and the legal requirements for tax purposes that each type brings.

There are also benefits and reporting requirements that are different for employees and independent contractors, and there are also obligations placed on the employee or independent contractor themselves. For example, employees have rights to certain workplace regulations like lunch breaks (and) overtime that independent contractors do not. Employees also have rights to things like unemployment Insurance benefits, disability insurance benefits, but they also have obligations to have things like disability insurance contributions and state Income tax withheld from their pay.

There are also certain recordkeeping and reporting requirements for each type of worker. Sam needs to find out ahead of time what his responsibilities are as the payer for these services. In both instances, whether he hires an employee or uses an independent contractor, Sam will have some need to conduct business with the EDD. And again, EDD is the State agency responsible for operating the Unemployment Insurance system. We also operate Disability Insurance, Employment Training Tax, Labor Market Information systems.

The EDD gathers the necessary information and collects the employment or payroll taxes that are used to operate these programs. So, if Sam hires employees, he will be responsible for filing regular reports of wages and withholdings, remitting his employer taxes and employee withholdings, as well as filing other required documents. As an employer, Sam is responsible for paying Unemployment Insurance tax (and) Employment Training Tax. He’s also responsible for deducting from his employees --  Disability Insurance tax and personal income tax.

Now, there are also federal rules and regulations that Sam needs to consider as well regarding employees and independent contractors. There are also federal taxes, federal payroll taxes, such as Social Security and Medicare. Now I’m also going to briefly mention some of the other responsibilities to the other government agencies that he may be subject to.

OK, so now that we know what Sam wants to do, what are some of the steps that he needs to follow? I’m going to talk about each one of these in a minute. But the first thing Sam again needs to do is he needs to decide whether he needs the services of an employee or the services of an independent contractor.  Because if the worker is an employee, Sam as the employer retains the right to control the work, tell the worker how to do the work, when to do the work, etc.

But if he decides to use the services of an outside company, or commonly referred to as an independent contractor, then that contractor controls the manner and means in which the work is done.

The second step is if his workers are employees, he needs to register with the necessary government agencies so he can start paying his payroll taxes. 

The third step is to make sure his employees, or his contractors, or both, have completed the necessary forms for the different government agencies. 

And then the last step is for Sam to make sure he himself has filed all the necessary forms. 

So let’s take a look at each one of these on the next slide.

OK, determine if using (employees) or contractors.

So again, before Sam does anything, he needs to decide whether he needs the services of an employee or the services of an independent contractor. In making this decision, a common scenario is when a business is busier than usual and extra help is needed. Sam was thinking about hiring some extra help just for these busy times. Sam was told by another business owner that there’s an easy way to do this and it would same him a lot of money in payroll taxes and other expenses. His friend told him to just hire someone temporarily and don’t put that person on the payroll, and have that person work as an independent contractor.  That person would only be there on a temporary basis, so it’s not like they’re a regular employee. Sam was told that as long as he issues him or her a 1099 at the end of the year, they’ll take care of their own taxes and that’s it. Sam would save a lot of money in payroll taxes, and not to mention workers’ comp. 

Now, Sam has to be very careful of this because this is one of the most common mistakes that business owners make:  misclassifying a worker. Too many business owners do what Sam is about to do: treat someone as an independent contractor because their friend or another business owner told them it’s OK to do so. 

It’s very important to identify the correct status of a worker.  As mentioned above, there are obligations placed on both the worker and the business. Again, when someone has employees, the business owner has the responsibility to file specific reports and remit payroll taxes to EDD. 

Again, Unemployment Insurance tax and Employment Training Tax are paid by the employer. State Disability Insurance and personal income tax are paid by the employee.  However, the employer is ultimately responsible for all of the required taxes and so he wants to be sure he’s collecting those taxes from his employees. There are many ways businesses can learn of their obligations and EDD is here to assist you.  We conduct free seminars that help you learn what’s required and how to determine if your worker is an employee or independent contractor. And I’ll talk more about the types of seminars that we offer a little later on.

But let me give you some background first on employees and independent contractors. Over the years, the courts have established laws regarding employment. Some types of services and occupations have clearly been defined by these laws or statutes in the California Unemployment Insurance Code as being performed by employees.  For example, a corporate officer or unlicensed contractor is an employee by statute, or by law. 

In other cases, when it’s not clearly defined by statute, we look at quote-unquote guidelines established by the courts, the California Code of Regulations and decisions by the California Unemployment Insurance Appeals Board. The courts have established guidelines and precedents through their decisions, and we commonly refer to them as the common law rules of employment, or the common law factors. The main factor in these guidelines is the right of direction and control, as you can see on the slide. Does Sam have the right to direct and control the manner and means in which the work is done?  If so, then an employer/employee relationship has been created.  Now in addition to the right of direction and control, there are a number of secondary or sub-factors that help determine if this right of control exists, as you can see in the round circles on the slide. Sam has to apply all these factors to his situation to see if his worker is really an independent contractor or an employee.

If you refer to the EDD website and some of our publications, there’s a lot of information on there on the whole employee/independent contractor issue. A very good information sheet on this topic is the DE 231 regarding employment.  If you look on the bottom, left-hand corner of the screen. You go on the EDD website, type in keyword DE 231. It’ll take you to the handout.

In there, in that handout, you can read more about the whole employee/independent contractor issue, and it also talks about the right of direction and control, as well as it gives you a list of those sub-factors that I mentioned, those guidelines that Sam has to use. So let me mention a few of these sub-factors. 

OK, some of these sub-factors are showing here on the slide.

Distinct trade or occupation. And this is something that Sam needs to address right away. Does the contractor, this independent contractor, have his own business?  Just like Sam. Is he a true self-employed individual, just like Sam? Does he do things that a self-employed person normally does?  Such as, does he have business cards for his business? Does he advertise his business, perhaps in the Yellow Pages or does he have his own website? Does he have his own office that he runs his business out of? Does he provide a service to a number of different people who hire him to do a job? Does he have his own employees, his own helpers? OK, all these indications that he’s in business for himself.

Skill level. Here we’re talking about training. Does Sam have to train or show the worker how to do the work? Again, an independent contractor is generally an expert in his field. He doesn’t need training to show him how to do the work.

Method of payment. How is the worker paid? Does Sam determine the method of payment and determine how he’s going to be paid? Usually, an independent contractor determines his own rate of pay for the job.

OK. Tools and equipment. Who provides all the tools and equipment for this worker to do the job? Is Sam doing that, or does the contractor provide all his own tools and equipment?

A couple of other factors are risk of loss. Can the worker make a profit or suffer a loss as a result of the work, aside of the money earned from the project? Integral part of the business. (Are) the contractor’s services so important that they have become a necessary part of the business?

So once Sam applies all the factors to his situation, he’ll get a clearer picture of whether or not his worker is really an independent contractor or not

In the handout, the DE 231, you get a list of all the factors.

There’s another very good resource that I want to mention and that’s the DE 1870.  This is an employment status questionnaire that Sam can fill out and send in to EDD and we’ll let Sam know in writing if his worker is an employee or independent contractor.  This a great tool for Sam to use if he’s not sure.

OK, so once Sam determines this, what’s his next step? 

So let’s go on the next slide to see what’s next. Step 2: Register with or comply with employer requirements.

 So if Sam does have an employee, he needs to register with the EDD and the IRS so he can (file) the necessary reporting forms and remit the funds.

Now, as Brenda mentioned earlier, to register with the IRS, you can fill out their registration form, which is called the SS-4, and the EDD form is called the DE 1.

Both registration forms are available online at each respective agency’s website, and in both situations, there are four ways to register: online, by phone, by mail or by fax. 

Now remember, if you have a corporation, as I previously mentioned, corporate officers are employees by statute.  So this would include your president, vice president, treasurer, and so the corporation would need to register with EDD and IRS as well. 

Now another very important thing for Sam to do is to when he hires employees is to learn about the applicable State labor laws. Things like overtime, minimum wage and workers comp. The Department of Industrial Relations, DIR, and its Division of Labor Standards Enforcement is another State agency that Sam needs to contact to learn about his responsibilities. Visit www.dir.ca.gov.

OK, so now let’s go on to the next slide to take a look at what forms are required. 

Employees and contractors should fill out correct forms. So these are the forms that Sam has to issue to his employees or independent contractors to fill out, OK, every time Sam hires a new employee and every time Sam uses an independent contractor. Again, these are completed by the employee and the independent contractor.

So for his employees, Sam has to give them the Federal Forms I-9, and the state form DE 4, but only if the situation if appropriate. The W-4 is an IRS form and the employee will fill it out to show what they want their withholding status to be. Most of us have filled out a W-4 before. It’s the form where we state whether we want to claim for example Married 1 or Single 0 for income tax withholding purposes.  Sam will need this information so he’ll know how much to withhold for some of the taxes. The I-9 is an employment eligibility verification form. Each employee must fill this out to show Sam that they’re legally able to work in this country. And then Sam will keep the W-4s and I-9s on file. The W-4 is available on the IRS website and the I-9 is available on the US Citizenship and Immigration Services website at www.uscis.gov

Now the DE 4 is the state version of the W-4. It looks very similar to the W-4. Sam will have his employees fill this out if they want to claim something different for federal and State purposes. For example, let’s say the employee wants to claim Single 1 for federal purposes, but wants to claim Single 5 for State purposes. Then the employee has to fill out a W-4 and a DE 4.  Now if the employee wants to claim Single 1 for both federal and State purposes, then he just needs to fill out a W-4, no DE 4. 

Now for Sam’s independent contractors, Sam has to give them the federal form W-9, as Brenda mentioned earlier. The independent contractor will complete the W-9 and give it back to Sam. Again, it provides Sam with info about the independent contractor, such as their name, address, Social Security number and/or ID number. The W-9 is also available on the IRS website. For EDD, there are no forms that Sam has to give to his independent contractors.

OK, so now let’s go on to the next slide and take a look at the forms that Sam has to fill out himself to report his payroll. 

Report employees and contractor information. On the federal side, there’s the IRS Form W-2. And we’ve all seen the W-2 before. This is the form that Sam has to give to all his employees to report so the employees can go and do their own income taxes. It lets the employees know how much Sam paid them for the year. Sam has to send this to all his employees by January 31st.

The IRS DE 34, Report of New Employees. Sam has to make sure he files this form every time he hires a new employee as part of the New Employee Registry, NER. The NER is a program to assist the State Department of Child Support Services and the Department of Justice in locating parents to collect delinquent child support payments. So every time Sam hires a new employee, he has to complete this form and send it in to EDD within 20 days of hiring the employee. And then that information is forwarded to the Department of Justice. To help make things easier for employers, there are many EDD forms that can be done online now, and this one of them. So Sam just needs to go on the EDD website, pull up the form, fill it out and send it off. 

The DE 9C, let me talk about that one first, is the Quarterly Contribution Return and Report of Wages. All employers must also file the DE 9C to report their employees for the quarter.  It’s just a listing of Sam’s employees and how much he’s paid them for the quarter. The form is used to gather the data used for Unemployment Insurance and Disability Insurance benefit purposes, and to report the personal income tax wages and personal income tax withheld from each employee for the quarter. The form is due within 30 days once the quarter ends. So, for example, right now, the fourth quarter just ended. October, November, December. So Sam has to send this in by the end of January before it’s considered late. 

The DE 9, Quarterly Contribution Return and Report of Wages. All employers must file the DE 9 to reconcile their payroll tax payments and total wages for the quarter. It’s a summary of all the wages paid and the taxes withheld as listed on the DE 9C. So again, just like the DE 9C, Sam has to file this form every quarter and again, the due date before it’s considered late is 30 days once the quarter ends.

So Sam has to remember to file both forms every quarter. One of the most common mistakes we see is employers making is just sending in one of the forms.  If we’re missing one of those forms, problems can arise regarding employee benefits, misapplied payments or erroneous notices or billing statement to Sam. And Sam has to remember to use the correct forms, too. 

Sam also has to remember to send in the DE 9 and 9C even if he doesn’t have any employees for the quarter. This is another common mistake that people make: “I don’t have any employees so I don’t need to send the forms in.” You would just mark them “no payroll” and send them in.  The same applies to the federal forms, 941 and 940.

Now for Sam’s independent contractors. Even though Sam will not be filing wage reports or paying payroll taxes regarding his independent contractors, he’s still required to fill out the DE 542, Report of Independent Contractors, every time he uses a new independent contractor so he can report that independent contractor to EDD.

The DE 542 is part of the NER program to help locate parents who are delinquent in child support payments. Sam has to report any new employees as well as any new independent contractors that he uses. And the same thing applies. The form has to be sent in within 20 days of hiring the independent contractor. And this form can also be done online.

As Brenda mentioned earlier, the 1099 is another form that Sam has to issue to his independent contractors. It’s kind of like the W-2. It lets the independent contractor know how much Sam has paid them for the year. And if he’s paid them more than $600, he has to give them a 1099. Sam has to issue these to all his independent contractors by January 31st.

OK, so those are all the forms that have to be completed by Sam. So now let’s go on to the talk a little bit about penalties and interest. 

How can Sam prevent penalties and interest? Of course, nobody wants to be receiving a penalty for a late payment or form, so here are a few things that Sam can keep in mind to prevent being penalized by EDD, and maybe the IRS too. 

Classify workers properly. The whole employee/independent contractor issue.  Again, this is one of the most common mistakes that business owners make. So the more Sam knows about this, the more familiar he’ll be with the differences between an employee and an independent contractor. Remember, EDD is here to assist you in making the correct status determination.

Use electronic filing, and what we call e-services.  Now, I’m going to talk a little bit more about this in a little bit, but this will make things easier and reduce errors for Sam as far as making his payments and filing his forms.

File your documents on time. It’s reports, DE 9, DE 9C, etcetera. File those on time. Again, even if he doesn’t have any payroll, he does have to file the forms.

One thing I didn’t mention is, as far as the penalties, there’s separate penalties for the forms and for the payments. So, a common mistake a lot of business owners make is, “Well, I’m not going to file the form because I don’t have the funds right now.” But just remember, there’s a different penalty even if the forms are not filed. So, if Sam files the forms, he can at least not have to pay (a) penalty for missing forms.

Make payments on time. Now because of time, I can’t talk about making payments, because this is one of the more complicated aspects of payroll taxes. Because payments can be due at different times than the forms, and it can be different for each employer depending on the size of their payroll. You can get more information about making payments on the EDD website, but Sam has to remember to take a look at what due dates are for his payments because in most cases, they are different than when the forms are due.

Respond timely to correspondences. This is important because we all know business owners are busy running their business, and they get things in the mail from us. A lot of those things are time sensitive. Sam has to make sure he takes a look at the notices he receives to make sure he doesn’t need to respond to them in a timely manner.

Attend free seminars and workshops. I mentioned this earlier. EDD offers free seminars to go over the payroll taxes. So if Sam wants more information or more detail about everything that I talked about today, he can come to one of our seminars. Our joint federal/State payroll tax seminar goes over all the responsibilities for both EDD and IRS. We go over all the forms that I mentioned as well as when to make the payments. We also have seminars just on employee/independent contractor. In addition, EDD presents joint seminars with the Division of Labor Standards Enforcement, where Sam could learn about labor law requirements, again such as minimum wage, overtime. We do all these seminars regularly statewide.  So go to the EDD website to see locations and to register online. 

One of the things that we always tell employers is to educate yourself on what your requirements are with the different government agencies. Even though you may not be handling this yourself -- perhaps you’re going to use an accountant or a bookkeeper -- it’s always good for the business owner to know what his requirements are, because ultimately the business owner is the one that’s going to be held responsible for missing payroll taxes or returns that are missing from the department.

Now in addition to our seminars, we also have a few online seminars or tutorials that Sam can take a look at. You go on to the EDD website. You can take a look at some of our online classes. And finally, if Sam has questions he call always call our Taxpayer Assistance Center -- it’s a toll-free number ((888) 745-3886) – with questions regarding payroll taxes.

OK, now let’s go on to the next slide. Let me talk a little about e-services for Sam that I mentioned earlier. So what e-services are available to help Sam? This is one of our newest programs, our e-services for businesses. These are some of the things Sam can do himself by creating an account, and then logging on to his own account to look at all these things. He can view his Unemployment Insurance tax rate and his rate history. He can register. He can make payments, file forms. He can make updates to his account, such as if he changes his address, he closes his business, he adds on a partner to his business, he decides to add a location. All these things Sam can do himself as part of e-services. He can file forms, and he can pay with additional credit card payment. It’s available 24/7 so Sam can do it anytime during the day, as far as making changes to his business. Just go on to the EDD website and look for the e-services logo, or type in keyword e-services to read more about it.

OK, so now let’s take a look at the next slide, which is the California Tax Service Center. Now what we gave you here is a website and a toll-free number to what we call the four main taxing agencies: IRS, Franchise Tax Board, Board of Equalization and the EDD.

Lot of good info on all the websites. Toll-free number if you have questions. You can always call … any of the government agencies. All the forms, publications on the websites. Different classes, seminars again are on the websites. The California Tax Service Center, www.taxes.ca.gov, has a lot of good information on it there as well for business owners. So take a look there.

OK, so now let’s go on to the next slide. Sam has taken the steps to be in compliance. Now he can relax, right? The main thing for Sam to remember after all this is to know what his responsibilities are, and more importantly, where to go for assistance.

OK, I think it’s time for another poll question. Do let’s go ahead and turn things back over to Jason.

Moderator Jason Montiel:

Great. Thanks, Jimmy. Now let’s take our third poll question. This will also help us as we plan future webinars.

The question is: Which of the following are you most interested in learning about?

You’ll have about 20 seconds to answer this question and we’ll start the time now. 

The options are: common law rules of employment, reporting employee and contractor information, preventing penalties and interest, e-services or none of the above.

We’ll take about another five seconds to receive your answers and if you’ve not yet entered a response, please do so now.

OK, we’ve closed the poll. We’re waiting for the results here. Ah, here we go. It looks like most of you are interested in learning more about common law rules of employment and also preventing penalties and interest.

Thank you so much for input. It’s really a big help.

Already, well, that concludes our main presentation. But there’s more! We’ll now take some questions from the audience. Any hopefully you’ve been writing your questions during the presentations … by Jimmy and Brenda. If you have not yet submitted your questions, please do so at this time and we’ll do our best to answer them in the next few minutes. And if we don’t get to your question, we’ll do our best to follow up later on.

OK, we have our first question now, and this one is from Meredith. It’s for Brenda, and the question is, can you please point me to a website that describes deductions?

Presenter Brenda Voet:

Well, the best website is the IRS website at IRS.gov because there you can get the publications I told you about: the 463 for the travel, entertainment, gifts and car expense, and Publication 535 about the business expenses. But I also want to let you know about signing up. IRS has sponsored webinars and seminars and they will list those on their website. And they even have a small business video to watch that contains a lot of really good information. And finally, you might want to check out the US Small Business Administration’s website. It’s sba.gov. One of the neat features there is there’s a community forum that will allow you to participate in discussions with other small business owners so you can ask questions and get your questions answered.

Moderator Jason Montiel:

Great. Thank you, Brenda. Next question is for Jimmy. This question is from Mary. Do I have to issue a 1099 to all my independent contractors, even if they just work for a few days?

Presenter Jimmy Wong:

OK, you only have to issue a 1099 to your independent contractor if you paid him more than $600 for the year. So even if they work for a few days, if its more than $600, a 1099 has to be issued to them. So if you go on the IRS website, there’s a lot of information about issuing 1099s and 1099-Miscellaneous. There are a few exceptions, such as for example corporations. If your independent contractor is a corporation, you don’t need to give them a 1099. But in this case, whether they work a few days doesn’t matter. They look at how much you paid them. So in this case, if it’s more than $600, you’ve got to give them a 1099.

Moderator Jason Montiel:

Great. Thank you, Jimmy. The next question is for Brenda. This one is from Joaquin. As a business owner, can I depreciate my car if I drive it for work and personal use?

Presenter Brenda Voet:

Oh yes you can, but you can only depreciate the portion that is for business use. So what you’re going to need to do is establish how much … your car was actually used for business. So you’re going to need to keep some adequate records, and typically the way to do this is a mileage log book. That’s a really good way to write down the mileage when you start your trip and when you end your trip. And then you can use that to figure out how much time ratio was used on that and you can deduct the business portion of the cost of your car. Depreciation is done where you can’t take this as an expense for the full cost. You can take a portion each year, so whatever portion is applicable to your car can be done. You can also deduct a business travel portion for your gas and maintenance, but it might be easier if you just deduct a standard mileage rate. For 2012, that was 55.5 cents per mile, and for 2013, it goes up to 56.5 cents per mile. So basically, whatever mileage you had in your mileage log for business purposes, you just multiply that by the 55.5 (cents) and that will give you your expense.

Moderator Jason Montiel:

Great. Thank you, Brenda. This next question is for Jimmy, and it’s from Anonymous. The question is what should you do if you have already misclassified an employee as an independent contractor?

Presenter Jimmy Wong:

OK, if you do have an independent contractor but you realize now you really have an employee, we encourage you to go back and report the employee to EDD by filing the necessary forms, reporting them on the quarterly return, the DE 9C, the DE 9, and then paying the necessary taxes that are associated with that. For example, Unemployment Insurance, SDI and so forth.

Moderator Jason Montiel:

Great. Thank you, Jimmy. This next question is for Brenda. It’s from Jean Marie. The question is do I have to issue a 1099 for services provided by big companies?

Presenter Brenda Voet:

Well … if the services are a normal course of the service(s) that are provided by that company, then typically no. I mean, if I hire someone to come on out and clean my business, I enter into a contract with them and that’s the information that’s in there. If it’s an independent contractor that you’re having coming on in, and you’re hiring them to do work for you as part of your business … it’s a little bit different. So Jimmy, do you have anything to add on that, with the 1099, what the difference is?

Presenter Jimmy Wong:

No. No. Again, like you said, if it’s part of the business, and they’re coming in to do work as part of the business, they really are an independent contractor and, yeah, you have to give them a 1099 if it’s more than $600.

Moderator Jason Montiel:

Great. Thank you both. This next question is for Jimmy. This one is from Lucas. What do if I try to send a 1099 to a contractor and it comes back to me as undeliverable because he or she moved and I can’t reach them? Am I liable in any way?

Presenter Jimmy Wong:

OK, if you’ve already tried to reach the independent contractor at the address that they gave you, the address that you have on file for them, and you can’t find them or it’s come back undeliverable, then you’ve done what you’re supposed to do. You cannot be held liable for that if you don’t have another address. We don’t expect you to go out to try to search for the person. In most cases, if the independent contractor has moved, they will contact you to let (you) know, “Hey, I have a new address now. Can you send me my 1099.” But if you can’t find them, just keep the 1099 on file in case the contractor does contact you later on for the form.

Moderator Jason Montiel:   

Great. Thank you, Jimmy. This next question is for Brenda. This is from Barry. Brenda, how many years should I keep documents such as bank deposit slips and receipts?

Presenter Brenda Voet:

Oh, that’s a good question. The normal statute of limitations for the IRS or the Franchise Tax Board to examine tax returns is a little bit different. The IRS has three years to examine tax returns, and the Franchise Tax Board has four years. So at a minimum, you should keep your tax records for four years. However, if you have a tax deduction that results from a transaction that occurred more than four years ago, then you should also keep that document. Like, for example, we talked about depreciation earlier. If you’re having to depreciate equipment that you placed in service in your business over a 10-year period, you should keep all those tax returns because we want to make sure that if you audited for let’s say year nine the depreciation, you can go all the way back to year one and be able to report that you took the right amount.

Moderator Jason Montiel:

Great. Thank you, Brenda. This next question is for Jimmy. What is the EDD DE 34 new hire form used for? And this one’s from Christina.

Presenter Jimmy Wong:

The DE 34 is to help the program EDD established to help locate parents who are not paying child support, or delinquent in child support payments. We’re working with the Department of Justice. We forward the information on to them to see if these are some of the people they’re trying to locate who are, again, delinquent or not paying child support payments.

Moderator Jason Montiel:

OK, wonderful. Thank you. This next question is for Brenda, and the question is from Zeke. Please tell me the FTB form I need to properly handle withholding for non-resident employees.

Presenter Brenda Voet:

Well, because they are an employee, it is something different. You don’t need to withhold on employees. That’s the good news, because the withholding is done through their paycheck. So there’s nothing extra you would need to do. However, if you’re paying an independent contractor, someone who’s not your employee, and they don’t live in California, then you do have a requirement to withhold 7% of whatever you paid to them and forward it to the Franchise Tax Board, and that’s done each year. And unless you get an FTB Form 588, with a non-resident withholding waiver, and basically what that form does is the non-resident says that, “I already file a California return, so you don’t need to withhold on me. I’m going to go ahead and take care of it myself.” And that form needs to stay with your records so that you have evidence that you understand that the non-resident is taking responsibility for that.

Moderator Jason Montiel:

Thank you, Brenda. This next question is for Jimmy, and it’s from Pearl. Are the phone numbers Jimmy gave only for tax practitioners?

Presenter Jimmy Wong:

No, those toll-free numbers are for everybody. (EDD: 888-745-3886; FTB: 800-852-5711; BOE: 800-400-7115; IRS: 800-829-4933) Anybody can call if they have questions for EDD, or I’m assuming she means the other government agencies as well. Anybody can call those numbers, yeah.

Moderator Jason Montiel:

OK, great. Thank you, Jimmy. I have another question for you, and this one is from Maria. Are employee rules different for family members?

Presenter Jimmy Wong:

Ah, good question. This is another common mistake a lot of people make, and that is, “Well, I didn’t put them on the payroll,” or, “They’re not my employee because they’re my son. They’re my brother.” Family members are still employees, so the same rules apply. But there is a law that states that some family members, even though they’re employees, they’re not subject to some of the taxes. If you get that DE 231 that I mentioned earlier, on employee/independent contractor, on the back of that form, it talks a little bit about family employment. But just, but very quickly, for example, if you’re a sole proprietor, in this case Sam, if Sam hires his 15-year-old son to work for him, as long as he’s under 18, he’s only subject to some of the payroll taxes, not all of them. OK, that’s one of the exceptions. So, again, if you look on the form, it will tell you what some of the other exceptions are. There are a few of them. Again, family members are still employees. It’s just that some of the family members are not subject to some of the various payroll taxes.

Moderator Jason Montiel:

Great, Jimmy. Thank you. This next question is for Brenda, and this one is from Jackie. The question is where can I get more info on depreciation?

Presenter Brenda Voet:

Well, Jackie, a good person to talk to would be an accountant. But if you want to get information online, there’s that publication I’ve been talking to you about all afternoon, at IRS Publication 535, for business expenses. And I believe it goes over some examples there. There’s also just general information available online if you Google depreciation, and they will show you how to take the cost and then the estimated value of it at the end. You subtract that out and then you take a portion of it. So if it’s a 10-year life, you take one-tenth in the first year and one-tenth in the second year until the cost is completely used up. So that’s how depreciation (works). It’s a basic accounting concept in there and I believe it’s in IRS Publication 535.

Moderator Jason Montiel:

Thank you, Brenda. Next question is for Jimmy. Jimmy, what is the deadline for sending out 1099s and W-2s to workers? This one is from Louie.

Presenter Jimmy Wong:

OK, Louie, your 1099s and your W-2s have to be sent out to independent contractors and to employees by January 31st. By January 31st they have to be sent out, and then another copy has to be sent in to – the 1099s go to the IRS. The W-2s go to the Social Security Administration. And they have to be sent in by the last day of February. 

Moderator Jason Montiel:

Great, Jimmy. Thank you. This next question is for Brenda. What advice do you have on determining the appropriate tax agency? This one is from Jim.

Presenter Brenda Voet:

Well, we have different tax agencies. So, we’ve got the sister agencies – The Franchise Tax Board is going to be the tax agency that helps you with the corporate income tax and the personal income tax. The Employment Development Department is going to help you with your payroll taxes. And, finally, the Board of Equalization is going to help you with your sales and use taxes. So, all of them have different specialties and different areas and different experts that can help you through these areas.

Moderator Jason Montiel:

Thank you, Brenda. We have one last question here, and this one’s for Jimmy. This is a follow-up on the misclassified employee question from earlier, and this participant wants to know are there any penalties for misclassification?

Presenter Jimmy Wong:

OK, penalties vary on a case-by-case basis. Usually, in most cases, if … a worker has been treated as an independent contractor but it turns out they’re really an employee, there usually (are) penalties involved. But again, it’s based on a case-by-case basis. … We have to look at things such as if (there’s) good cause involved to determine whether a penalty is to be charged. So, it’s on a case-by-case basis. All I can say is there can be penalties involved and interest if you misclassify a worker.

Moderator Jason Montiel:

Great, Jimmy. Thank you very much. OK, well, we’ve run out of time for today, and once again I would like to thank our guests: Brenda Voet from the Franchise Tax Board and Jimmy Wong from the Employment Development Department.

We appreciate all of this excellent information.

I want to remind you that a video replay of today’s webinar will be available in about a week.  If you would like to watch or share the replay, please visit our YouTube channel or the Controller’s California Strong webpage at californiastrong.ca.gov.  At that link you can also sign up to receive updates and information related to future webinars hosted by the State Controller.

That’s it for our presentation.  Thank you for watching and have a great day!