News and Headlines

Partnership Income Tax Changes

Historically partnerships are not subject to income tax – income, gains, losses, deductions, or credits flow through to the partners on their respective K-1’s. However, as part of a budget agreement enacted last November, Congress has replaced the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) with the Bipartisan Budget Act of 2015 which governs the rules of partnership audits. These new rules say that any adjustments made to any items of income, gains, losses, deductions, or credits are taxed at the partnership level and the partnership is liable for any penalties or underpayments of tax at the highest rate of tax in effect for the reviewed year.

When do these new rules take effect?

The new rules take effect 1/1/2018

Can the Partnership elect out?

Yes, if the following applies:

  1. Partnership has less than 100 partners
  2. Each partner is an individual, an estate of a deceased partner, an S corporation, a C corporation, or a foreign entity that would be treated as a C corporation if it were domestic Note: a partnership that has as a partner another partnership / trust (this includes grantor trusts) or has a tax exempt organization as a partner (depending on the type of nonprofit entity) may NOT elect out of the above rules!
  3. An election is made with a timely filed partnership tax return
  4. The names and identification numbers of the partners are listed on the timely filed return
  5. All partners are made aware of the elections

What does this mean for you?

Talk to your business attorney about how the new rules may impact your partnership. Consider possible amendments to current partnership agreements already in place.

  1. Should the agreement be altered or drafted to REQUIRE an election out of the above rules if the partnership qualifies?
  2. Should the agreement prohibit transfers of partnership interests to persons/entities that would prohibit/terminate the election out?
  3. Who in the partnership will be the tax representative (partner in charge of coordinating and dealing with tax matters) and how will that person be determined?

If you have any questions feel free to reach out to us or stop by our office.

- Jan and Team.

Document dated 7/12/2017


Federal and California Tax Update

We want to take this opportunity to remind you of the process for Vanderbilt CPAs accessing your "MyFTB" accounts and make you aware of some updated Federal and California filing dates.

Why does Vanderbilt access your account?

We access your account to confirm that the amounts that the FTB has credited to your account agrees to your records and ours. It saves significant time now and avoids unwanted correspondence with the FTB later.

Franchise Tax Board - Accessing "MyFTB"

You will receive a letter from the FTB indicating someone has accessed your account with them. The probability is the person is one of the VCPA team members.

What will the letter look like?

The letter will be titled “Access Granted to Your MyFTB Account” and will contain your name, your FTB account number and a brief paragraph notifying you of who has accessed your account and how long that person has access to your account.

What if you do not recognize the person who has accessed your account?

Vanderbilt staff accesses your account to confirm tax payments made and other information related to your tax return. It may be any one of us: Jan Vanderbilt, Tom Atherton, Carmen (Carmine) Lepiane, Piper Magallanes, Angie Negrete or Kyle Shatraw. We are attempting to streamline the process by requesting information early this year. If the FTB reports access to your account by someone other than Vanderbilt staff, please notify us immediately and we will help you with the "next steps".

What are the new Federal and California filing dates?

March 15th (Extensions until September 15th)

  • Federal Form 1065, U.S. Return of Partnership Income and California Form 565, CA Partnership Return of Income
  • Form 1120S, U.S. Return For an S Corporation and California Form 100S, CA S Corporation Franchise or Income Tax Return

The above dates are the due dates for the tax returns and also for the schedules K-1 that the entity must provide to its owners.

April 15th (Extensions until October 15th, unless noted below)

  • Form 1040, U.S. Individual Income Tax Return and California Form 540, CA Individual Return of Income
  • Form 1041, U.S. Income Tax Returns for Estates and Trusts (EXTENSIONS UNTIL SEPTEMBER 30TH) and California Form 541, CA Fiduciary Income Tax Return
  • *Form 1120, U.S. Corporation Tax Returns (EXTENSIONS UNTIL SEPTEMBER 15TH) and California Form 100, CA Corporation Franchise or Income Tax Return
  • FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

*It should be noted that June 30 fiscal year-end C Corporations have a due date of September 15th and can get extensions to April 15th. Other Fiscal year end C-Corporations are due the 15th day of the 4th month following their year-end and can be extended until the 15th day of the tenth month following their year end.

If you have any questions feel free to reach out to us or stop by our office.

Document dated 12/20/2016


Post-Election Tax Planning

With the conclusion of the 2016 Presidential election, it’s very likely that the tax law will receive a dramatic makeover. Although it’s tough to predict what tax reform will look like next year, it’s clear that President-elect Trump and the Republican-controlled Congress want to lower taxes. Now seems like the perfect time to explore tax planning strategies that align well with the new administration.

Summary of Trump’s Tax Proposal

At the center of Trump’s tax proposal is the creation of three individual tax brackets—with 12%, 25%, and 33% rates. This would lower the top individual tax rate from 39.6% to 33%. In addition, Trump would like to get rid of personal exemptions, the Alternative Minimum Tax (AMT), and the 3.8% Net Investment Income Tax (NIIT). On the flip side, Trump has proposed to increase the maximum standard deduction from $12,600 (married filing jointly) to $30,000. However, both Trump and the House GOP Tax Reform Task Force would limit the use of itemized deductions.

From a business standpoint, Trump’s proposal cuts the top corporate tax rate from 35% to 15%. More importantly, Trump would like to limit the tax rate on income from pass-through businesses and sole proprietorships to 15%. That means that owners of S corporations, partnerships, and sole proprietorships would pay significantly lower taxes on business income (from 39.6% to 15% in some instances). In addition, Trump would get rid of depreciation deductions, but allow businesses to deduct the cost of asset acquisitions. Most other business deductions would be eliminated.

Tax Planning Opportunities

Given that lowering taxes is toward the top of Trump’s list, there may be opportunities to accelerate deductions in 2016 and defer income until 2017. Of course, these suggestions are based on what could happen. There is always uncertainty with the future of tax policy. Therefore, you can call us to sort through the potential risks of any of these strategies.

Accelerate Itemized Deductions in 2016. If you currently take advantage of itemized deductions, you may want to accelerate next year’s deductions into this year. This is because Trump’s plan would make it hard for many taxpayers to take these deductions. Consider—

  • Increasing charitable contributions before year end.
  • Pursuing elective medical procedures if you think total medical expenses will exceed 10% of your adjusted gross income.
  • Paying property taxes and/or state income taxes early. But, watch out for the AMT, as these taxes are not deductible for AMT purposes.

Defer Income until 2017. There are various ways to defer income until the following tax year. Here are a few ideas:

  • Employees could pursue deferred compensation arrangements at work. Also, if bonuses are not yet due and payable, employees could request that bonuses be paid early next year.
  • Employees could increase contributions to their 401(k) or other pre-tax retirement accounts in 2016.
  • Taxpayers turning 70½ in 2016 could defer first year Required Minimum Distributions (RMDs) from an IRA or 401(k) plan until 2017. Although these taxpayers would be taxed on a double distribution in 2017, this may be beneficial if tax rates are lower.
  • Taxpayers seeking to convert a traditional IRA into a Roth IRA could wait until 2017 to take advantage of lower tax rates.
  • Those with substantial investment income could wait until 2017 to sell their investments. If Trump is successful in repealing the 3.8% NIIT, investors could save a lot of money.
  • Business owners could wait to sell their businesses in 2017 or structure the deal as an installment sale.

Opportunities for Business Owners

  • Trump’s plan also presents unique opportunities for business owners. Given that Trump’s plan would tax business income, including that of a flow-through entity and sole proprietorship, at 15%, cash basis business owners could wait until next year to bill customers or accelerate payment of certain expenses, such as office supplies and repairs and maintenance, to 2016. Business owners may also want to purchase new and used equipment or software before year-end. Up to $500,000 of these costs can potentially be expensed this year as long as total purchases don’t exceed $2,000,000. However, limits apply to the amount that can be deducted for most vehicles. Also, you cannot claim a Section 179 write-off that would create or increase an overall business tax loss.

Conclusion

Through careful planning, it’s possible you can take advantage of Trump’s tax reform plan. However, the items discussed in this letter are merely ideas at this point—we don’t know if or when they’ll become law. We’d be glad to set up a meeting with you to discuss the best way to plan for the changes that will most likely come. As always, please don’t hesitate to call us with questions.

Document dated 12/20/2016


Required Minimum Distributions

Most people have to start taking withdrawals from any IRA, SIMPLE IRA, SEP IRA, or retirement plan accounts when they reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

Your Required Minimum Distribution (RMD) is the Minimum amount you must withdraw from your account each year - you can always withdraw more. If you fail to take your RMD or if the distributions are not large enough, you are subject to a 50% excise tax on the amount not distributed as required.

Some plan custodians are no longer automatically calculating the RMD's as they traditionally did in past years. By the time we discover the oversight as part of the tax preparation process it is too late for a timely distribution to be made.

We recommend that you take a proactive approach and reach out to your retirement plan custodians to confirm that they will calculate and distribute the required minimum distribution in 2016.

If you have any questions feel free to reach out to us or stop by our office.

Document dated 12/20/2016


To our clients:

As all of you know cyber security has become more and more important in this age of technology. In an effort to protect taxpayer identities the State of California Franchise Tax Board (FTB) has updated its security to notify you by mail when your account has been accessed. It’s probably Vanderbilt – we access your account to confirm payments as we are preparing your tax return.

What if you do not recognize the person who has accessed your account?
There are specific steps that you must follow that are given on the FTB letter that will allow you to restrict access to your account via either logging on to the FTB website or placing a call to the FTB. Please call us before restricting access to your account. A member of our team you may not have worked with in the past might be the person named in the letter.

What the letter will look like?
The letter will be titled “Access Granted to Your MyFTB Account” and will contain your name, your FTB account number and a brief paragraph notifying you of who has accessed your account and how long that person has access to your account.

If you have any questions feel free to reach out to us or stop by our office.

- Jan, Tom, Piper, Carmine, Angie and Kyle

Document dated 2/09/2016


To VCPA business clients:

Asset expense policy

The IRS has listened to the tax professionals and given businesses some administrative relief by not requiring them to capitalize and depreciate small items. By adding detailed descriptions to purchases in your accounting systems it will allow us to quickly determine whether certain items should be capitalized or not also relieving follow up questions from us.

We look forward to using this change to the regulations to help reduce your tax burden to the correct tax, which is the lowest legal tax, during this 2016 filing season and beyond.

What should I do?

Your business should have a written policy stating that it will deduct individual items that cost less than applicable amount of $2,500 or the maximum amount allowed under the Internal Revenue Code.

When entering the description into your accounting system for purchases of items where the cost is greater than $2,500 enter the number of items purchased. For example – if you purchase computers for $10,000 describe the number of computers purchased so it is obvious whether or not the items can be expensed currently or must be capitalized and depreciated. If two or three computers were purchased, the probability is that most, if not all, of the $10,000 should be capitalized and depreciated. If five or six computers were purchased, the probability is that most, if not all, of the $10,000 would qualify as a current year expense.

Are all purchases subject to this regulation?

No. Supplies that are used in day-to-day operations of your business are still currently deductible as they have always been. Materials and supplies used to produce inventory must still be included in the cost of the inventory. Materials and supplies used to produce a large asset, such as a building, must still be included in the cost of the asset and depreciated over the appropriate useful life.

Background

Under the Internal Revenue Code a business is allowed to deduct ordinary and necessary expenses incurred during the tax year in carrying on a trade or business. There are also regulations on when an expense is currently deductible and when the cost of the item purchased must be capitalized and depreciated over a number of years.

Due to multiple court cases on the subject of what can be deducted vs. capitalized in years past there has been confusion and inconsistency of treatment from one company to another. For the tax year 2014 the IRS finalized regulations that stated most businesses could elect to expense items that cost less than $500 and would have to capitalize and depreciate items purchased that cost $500 or more. Because the dollar value was so low it caused significant discussion and complaints from tax preparers around the country. The IRS has modified its position and will now allow electing companies to deduct items costing up to $2,500 per unit. Individual items over the $2,500 limit are to be capitalized and depreciated over an appropriate number of years.

Document dated 1/13/2016


To our business clients:

It’s that time of year again, so blow the dust off your files and start clearing those reminders on your e-mail that we had you create last year! Our team came up with a short list of items that we need to complete your 2015 corporate and partnership returns. Please keep in mind that not all of these items will apply to your business:

  • Year end bank statements for all major bank accounts
  • Year end bank reconciliations for above accounts
  • Fixed asset acquisitions summary (if account detail memos in QuickBooks are not clear)
  • Schedule of assets disposed of during the year
  • Officer W-2’s
  • End of the year loan statements (principal balance should agree to your year end balance sheet)
  • Support for material year end liability accounts in QuickBooks (major credit cards, etc.)
  • Schedule of owners health insurance premiums paid
  • Support for any unusual transactions

In addition to providing us with the above documentation (as applicable) we will also ask that you answer the questions on your organizer and fill out the appropriate tabs/fields in the spreadsheet that comes with the organizer (look for it in your email soon).

Document dated 01/06/16


Congress delivers holiday cheer by passing new tax legislation

Santa is on his way and he is bringing with him some important tax legislation for both individuals and businesses that have been either extended or made permanent by Congress. Its signed, sealed and almost delivered.

Here is a list of some of the important provisions for individuals:

  • Enhanced Child Care Credit – Up to $1,000 credit per qualifying child (Permanent)
  • Enhanced American Opportunity Credit – Up to $2,500 credit for the first four years of postsecondary education (Permanent)
  • Enhanced Earned Income Credit – A refundable credit for low income families with three or more qualifying children (Permanent)
  • Sales Tax Deduction – Allows taxpayers the option to claim a deduction for general sales taxes instead of a deduction for state and local taxes (Permanent)
  • Above the line deduction for educators who purchase school supplies for their classroom – Up to $250 deduction for classroom expenses and expanded to include expenses associated with the professional development of the educator (Permanent)
  • Individuals at least age 70 ½ can exclude qualified charitable distributions from Individual Retirement Accounts (IRAs) from gross income, up to $100,000 per taxpayer (Permanent)
  • Qualified tuition deduction – Allows for an above the line deduction of up to $4,000 for higher education tuition costs (extended through 2016)
  • Mortgage insurance premium deductible as interest (extended through 2016)

In addition to handing out holiday cheer for individuals Santa, along with Congress, also extended or made permanent the following provisions for businesses:

  • Research and Development Tax Credit – This credit can be used to offset alternative minimum taxes or payroll taxes in certain situations. Applies to corporations or partnerships with gross receipts less than $50,000,000 in a tax year (Permanent)
  • Employer–paid mass transit and parking benefit programs have been expanded to include bike sharing programs (Permanent)
  • 100% exclusion on Section 1202 stock – Allows for a taxpayer who sells qualifying small business stock (held for more than 5 years) to exclude 100% of the gain (with certain limitations).
  • Section 179 provision – Entitles taxpayers to deduct up to $500,000 of the cost of qualifying assets with a phase out starting at $2,000,000 (permanent)
  • Retailers and restaurants can now depreciate remodeling and other improvements over 15 years rather than the previous 39 years. (Permanent)
  • Bonus depreciation – Allows for up to 50% the cost of certain improvements and asset acquisitions to be expensed (Phased out over the next five years)
  • Work opportunity credit – Gives retailers a tax break for hiring disabled and economically challenged individuals (Renewed for five years)
  • The legislation also includes a reduced holding period (five years rather than ten) for which a C corporation converted to a S corporation must hold its assets in order to avoid the built in gains tax (Permanent)

If you have any questions regarding the new legislation feel free to contact us but be sure to bring milk and cookies if you stop in.

-The VCPA Team

Document dated 12/18/2015


Social Security Planning Just Became Urgent

It came as a big surprise to just about everybody that on November 2nd President Obama signed a budget bill that included a huge “gotcha” for a certain segment of the Boomer generation who qualify for Social Security benefits.

Who is affected: Married couples in the age range of 62 and 70 who qualify to receive Social Security benefits.

Here’s what changed: Two planning strategies – file and suspend and restricted application for spousal benefits will be eliminated as of April 30, 2016.

It’s complicated to explain in an email, but we will do our best.

File and suspend is a strategy to obtain spousal benefits now while deferring the highest earner benefits to a later date, allowing those credits to continue to grow. Both spouses must be at least age 66 to employ this strategy.

Basically what this means is that the higher earner files an application, then immediately suspends the application. The claimant then continues to accrue credits until a later date, say age 70, therefore realizing up to four years of delayed retirement credits, or can lift the suspension at any time and request a lump sum payment of benefits back to the earlier claim date.

The spouse then files a restricted application to claim spousal benefits only, while accumulating delayed retirement credits prior to applying for benefits on his/her own earning record at a later date (typically age 70).

The Restricted Application Method allows a spouse who is eligible for both a spousal benefit based on his/her spouse’s earnings and a retirement benefit based on his/her own earnings to file a restricted application for spousal benefits only, then delay applying for retirement benefits based on his/her own earnings record to age 70. For those who turn 62 after 2015, the Act eliminates the ability to file a restricted application for only spousal benefits. The bill’s language appears to leave an open window to those 62 or older in 2015 to file restricted claims for spousal benefits only upon reaching full retirement age.

Our experience in the past has been that the Social Security Administration is - perhaps surprisingly – very helpful. Start by contacting them, and of course remember we are here to help.

Document dated 11/04/2015


Subject: IRS Letter 5071 C – Identity Theft

Friends,

We recently became aware of IRS’ latest tool in the fight against identity theft and want to share it with you. IRS Letter 5071-C looks like it might be a scam, but it is NOT – it’s the real deal. If you receive this letter in the mail, it means IRS has received a tax return in your name that for one reason or another they deem suspicious. The form will direct you to a website, idverify.irs.gov, that attempts to determine if your account with IRS has been “hacked.” Alternatively this letter offers an 800 number to call.

Please be aware that you will NEVER be asked to verify your identification via email and the IRS will NEVER initiate contact with you to verify your identification via phone.

Here are some facts from the IRS website (www.irs.gov) that give further insight and answer some questions that you may have regarding Letter 5071 C.

So, if you have gotten this letter what does it mean?
This letter is meant to inform you that the IRS received a tax return with your name and/or social security number and needs to verify that you filed the return (someone else did not file a false return).

What should I do if I receive this letter?
If you receive Letter 5071C, you should access idverify.irs.gov. Once on the site you will be asked a series of questions to verify your identity. After you verify your identity, you can confirm whether you actually filed the tax return that the IRS has flagged. If you did not file the tax return, the IRS will assist you in taking the necessary steps to remedy the situation.

What about my refund?
If you did file the return, your return will be processed and you’ll be issued a refund, if one is due.

Please note that if you are uncomfortable using the website or are unable to access the internet you can also call a toll free number that is listed on the letter (but it is the IRS you’re calling so expect a wait).

Identity theft is becoming more and more common so remember a few key things:

  • 1. Don’t respond to email claiming to be from IRS.
  • 2. Don’t give personal details on the phone like social security numbers or birthdates.
  • 3. IRS.gov is the official IRS web site. So when visiting an IRS website always look for a URL ending with .gov – not .com, .org, .net, or anything else.

Please don’t hesitate to contact us if you have any questions regarding this issue or if you are ever unsure about a communication you receive from someone claiming to be from the IRS or another tax authority.

Have a great summer!

The VCPA Team

Document dated 07/15/2015


NEW LAW – SICK LEAVE POLICY
If You Have Employees, even Household – THIS MEANS YOU! READ ON…

Friends,

A new law effective July 1, 2015 requires California employers to provide paid sick leave benefits to their employees, including part time and temporary employees.

We encourage you to seek guidance from legal counsel experienced in employment practice matters to review your company’s compliance with the requirements of the new law and to assist you if revisions to your policies and procedures should be made.

Here is the “nutshell” version that hopefully will encourage your follow up as appropriate.

Who is eligible?
Employees who work at least 30 days in a year are eligible to receive paid sick leave. Employees can begin using accrued sick leave once they have worked for an employer for 90 days. To avoid the administrative hassles of the accrual and carryover requirements, an employer can make three days of paid sick leave available to each employee at the beginning of each year.

Who is not eligible?
Certain employees covered by collective bargaining agreements, certain individuals employed by air carriers, and employees of the California In-Home Supportive Services Program are not eligible to receive paid sick leave.

How is sick leave accrued?
Employees will accrue one hour of paid sick leave for every 30 hours worked. Paid sick leave must carry over from year to year, but employers can place a cap on accrual of 48 hours (or six days).

How is sick leave used?
Employers can limit an employee’s use of sick leave to 24 hours (or three days) per year. Employers can also require employees to take sick leave in at least two hour increments, but not more. Employers do NOT need to pay out accrued sick leave when an employee leaves the company, however if the employee is rehired within the year, accrued sick leave must be reinstated.

Will my current PTO plan qualify?
Maybe. Check out the website below for additional information and by all means, consult with your HR professional if you currently have a PTO plan in place.

What recordkeeping is required?
The amount of available sick leave must be recorded on each paystub. Employers must keep records of sick leave accrual and use for three years. A sick leave poster, available from the California Labor Commissioner, must be displayed at the workplace.

Additional information and resources are available on California’s website under the Division of Labor Standards Enforcement at http://www.dir.ca.gov/dlse/ab1522.html

Document dated 06/19/2015


Statement of Information Late Fee

To our business clients and colleagues:

In the “good old days” the CA Secretary of State mailed their Statement of Information forms to those businesses required to file (LLCs and corporations primarily). This was an effective system with few problems. However, in its wisdom, the Secretary of State, who has ceded its collection authority to the Franchise Tax Board, now sends a tiny postcard notification advising businesses to go online to file the statement. In 2014 many of our clients found themselves with a $250 penalty as their first inkling that something should have been done.

This is a tricky system, because the due date is different for each entity, based on the entity’s original organization date – NOT fiscal year end. If you would like us to handle this filing for you, please give us a call and we will research the appropriate filing date for your business and prepare the statement each year for you.

Our fee in 2015 will be $100 to prepare and file the statement, plus a one-time setup fee of $50. (Remember the fee payable to the Secretary of State is $25 annually, payable in addition to our fee, of course.)

Give our office a call if you are interested and we’ll set you up - Or, be on the lookout for that postcard!

Have a great summer!

Document dated 05/6/2015


Health Fringe Benefits

This is a friendly reminder that you need to add health fringe benefits paid by the corporation to your W2 if you owned more than 2% of an S corporation’s stock or you are a family member of a 2% or more shareholder (regardless if you have stock in the S corporation).

Which benefits are subject to this treatment?

1. Health insurance premiums
2. Life insurance premiums
3. Disability insurance premiums
4. Long-term care insurance premiums

Your payroll company is set up to handle this but you will need to provide them with the dollar amounts paid before their year-end deadlines. Please do not hesitate to call Piper Magallanes in our office if you have questions at (831) 620-0811.

Document dated 12/19/2014


Auto Fringe Benefits

If your corporation owns or leases the car you drive, please remember the percentage that you use the car for personal purposes is taxable to you and must be included on your W-2 (the most common example of personal use of a vehicle is commuting to and from work). The taxable amount is a simple calculation based on IRS Tables that we can figure for you. If you have any questions please give us a call before the end of the year, we are happy to help.

Document dated 12/19/2014


Avoid Compliance Penalties on Independent Contractor Reporting

With limited exceptions, every person, corporate or otherwise, engaged in a trade or business who makes payments aggregating $600 or more to another person (e.g., an independent contractor) in a calendar year must file an information return (Form 1099-MISC) setting forth the payee's name and address and the amount paid, and furnish a statement to the payee.

(1) Form 1099-MISC is required for noncorporate service providers. Employers must provide a Form 1099-MISC, Miscellaneous Income, by Jan. 31, 2012, to any noncorporate service provider who was paid at least $600 for services during 2011. The Form 1099-MISC does not have to be provided to a corporate service provider. Employers must provide Form 1099-MISC to sole proprietorships, partnerships, attorneys, and medical service providers who do business as corporations.

(2) Form 1099-MISC is not required if contractor paid electronically. There is no requirement to send a Form 1099-MISC to any contractor that was paid electronically, such as by credit card, debit card, PayPal, or gift card. The bank or credit card company that made the actual payment to the contractor will send the contractor Form 1099-K, Merchant Card and Third Party Network Payments.

(3) The first five digits of the TIN can be replaced with asterisks or Xs on the payees' paper copies of Form 1099, but copies filed with IRS must have their full TIN.

(4) If you are unsure whether a Form 1099-MISC is required to go ahead and send one. Employers can't go wrong by sending more 1099s than are required, but could be subject to penalties if they do not send all qualified service providers their Form 1099-MISC.

(5) File forms on time. Paper copies of Forms 1099-MISC must be mailed to the IRS no later than Feb. 28, 2012. The filing deadline is NOT extended to February 29, 2012. Forms 1099-MISC filed electronically must be submitted to the IRS by April 2, 2012.


New CA Law — Senate Bill 459 Independent Contractor Status

Effective January 1, 2012, California has a new law, Senate Bill 459 (SB 459), which significantly increases the penalties that can be assessed against employers who willfully misclassify as independent contractors individuals who should be treated as employees. If your business utilizes independent contractors, it is extremely important that you take the time now to understand the impact of this new law to your company and to take the necessary steps to ensure appropriate compliance with this law. The highlights of the law are summarized below for your reference, although they are not meant to be all-inclusive.

SB 459 makes it unlawful for any person or employer to engage in “willful misclassification” of an individual as an independent contractor. The law also prohibits charging individuals who have been misclassified as independent contractors a fee or making deductions (e.g., for space rental, goods, equipment maintenance) from compensation if those acts would have violated the law had the individuals not been misclassified.

This new law comes on the tail of the IRS’s recent announcement regarding its new settlement initiative, the Voluntary Classification Settlement Program (VCSP), allowing employers to: 1) come forward if they are not under audit, 2) reclassify independent contractors as employees, and 3) pay a significantly reduced employment tax.

Who has authority to assess compliance and penalties?

SB 459 authorizes the Labor and Workforce Development Agency, specifically the Labor Commissioner or a court, to assess specified civil penalties on persons or employers violating the law. SB 459 also requires the agency to take other specified disciplinary actions against these individuals.

What happens if I am found to have violated the law?

The law requires employers who are found to have engaged in a misclassification “to display prominently” for one year on their websites a notice to employees and the general public announcing, among other things, that the employer “has committed a serious violation of law by engaging in willful misclassification of employees.” The notice must be signed by a corporate officer.

What are the fines and penalties?

Violation of the new statute carries exposure for a civil penalty of between $5,000 and $15,000 for each violation. If the employer is found to have engaged “in a pattern or practice of violations,” the civil penalty is increased to $10,000 and $25,000 per violation. The law does not define the term “pattern or practice.”

Where should I go for assistance and additional information if I have independent contractors?

We strongly encourage you to consult with legal counsel experienced in employment practice matters to review your independent contractor relationships, to determine the appropriateness of these classifications, and to assist you if re-classifications may be required to mitigate potential legal exposures to your business.

As always, please give us a call if you have any questions or would like to discuss this matter further.

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