Both the IRS and the California Employment Development Department (EDD) are still looking for employers who treat workers as independent contractors instead of employees and try to avoid employer-paid payroll taxes. The IRS is right behind them. In fact, the IRS just ruled that payments to an LLC need to be issued a Form 1099 (unless you can prove the LLC is really a corporation).

The EDD is partnering with other state agencies to perform UNANNOUNCED on-site business inspections where noncompliance has been an issue. The are partnering with the Dept of Industrial Relations, Dept of Insurance, the State Sales Tax Board of Equalization, the Detp of Justice, and the Contractors State License Board.  They have formed the Joint Enforcement Strike Force (JESF) combating the underground economy.  Currently they are focusing on the following industries:

• Agriculture
• Auto body
• Car wash
• Construction
• Garment manufacturing
• Restaurants

Keep in mind that the California FTB/EDD are collecting taxes and penalties. The EDD will calculate the unpaid payroll tax.  Then they charged penalties for the following:

• Failure to file returns
• Failure to register with the EDD
• Deficient employer contribution penalty
• Failure to file W-2/1099 

This just gives you an idea that California will NOT PLAY NICE.  If you have registered yourself or your employees with the California Employment Development Department (EDD), you need to look at this website about registering as an employer .

Also - keep in mind that an employer must submit a copy of Form W-4 or Form DE-4 to the FTB if:

• The employee claims ten or more withholding allowances;
• The employee claims "exempt" and the weekly wages exceeds $200
• The employee makes changes to the pre-printed form, crosses out words, etc
• The employee admits that Form W-4 or DE-4 is false 

You can send a copy of the Form DE-4 to the FTB at fax number (916) 843-1094; or mail to the Franchise Tax Board at: Franchise Tax Board, W-4 Unit MS J-40,  P.O. Box 2952, Sacramento, CA 95812-2952 .

They are also tracking your independent contractors.  If you hire an independent contractor you need to report this to the EDD via form DE 542.

You may use any of the following to report independent contractor information:

• Submit a Report of Independent Contractor(s) (DE 542) electronically with e-Services for Business; or
• Submit a paper DE 542. A fill-in DE 542 can be downloaded; or
• You may create your own form with the required information.

To report independent contractors, mail or fax information to:

Employment Development Department
PO Box 997350 MIC 99
West Sacramento CA 95899-7350

Fax: 916-319-4410

If you want you file your own Form 1099's you can do it yourself using QuickBooks E-file 1099s.  California has a great FAQ webpage that is very helpful with the details of reporting.