By Robert S. Schriebman
I recently read of a new $63-per-head fee to cushion the cost of covering workers with pre-existing conditions under Obamacare. Those commenting on the new law speculate that this charge may prove to be very expensive for medium and large sized companies. This got me thinking of the employers who may try to avoid Obamacare by treating their workers as independent contractors. What is the EDD likely to do in the future to penalize employers who attempt to avoid Obamacare? Will this increase the likelihood of the IRS getting involved in a "me too" audit and assessment?
The formal name for Obamacare is the Patient Protection and Affordable Care Act (PPACA). It goes into effect initially on January 1, 2013, and becomes fully effective January 1, 2014. In order to be subject to Obamacare there must be a minimum of 50 or more employees working 30 or more hours per week. While 96% of all U.S. businesses have fewer than 50 employees, our office had many clients over the years who will definitely qualify for Obamacare.
There are federal fines for avoiding Obamacare. The fines start at $2,000 for each worker per year. After 2014, this penalty will increase by the annual cost of living. If the employer fails to provide an "affordable" health plan, there are additional penalties in the amount of $250 per month per employee. These laws are very complicated and these comments are meant as a broad overview. Because the Supreme Court earlier this year ruled that these penalties are a form of a tax, the IRS will be in charge of collecting these penalties.
Obamacare could very well mean greater information sharing between the EDD and the IRS when the EDD discovers improper worker classification issues. I believe that there will be greater exposure to the IRS upon completion of the EDD audit. This is important to know because the EDD is generally the first responder to worker claims involving unemployment benefits, especially for those workers treated as independent contractors. EDD audits usually start when a terminated worker files a UI claim. My experience shows that the misclassified worker usually gets UI benefits because it is in the best interest of the EDD to award these benefits in exchange for the worker essentially becoming a whistle-blower.
The EDD has many penalties it can assess against an employer attempting to avoid Obamacare by treating the workers as independent contractors. Effective January 1, 2012, new Labor Code § 226.8 provides that it is unlawful for any employer to willfully misclassify workers as independent contractors. Tough new civil penalties, ranging from $5,000 to $25,000 will be assessed for each violation. I am of the opinion that the risk of treating known employees as independent contractors is great.
An employer wishing to avoid Obamacare may follow a pattern of not issuing W-2s or 1099s to workers in violation of the law. This action alone will generate two separate penalties that must be paid first before they can be contested. The first is a Worker Statement Penalty of $50 per employee for each failure to furnish a timely or accurate W-2 or 1099 (CUIC § 13052). The second nonappealable penalty is found in CUIC § 13052.5. This amounts to a penalty of almost 10% of gross compensation paid to all workers found to be employees. These are very tough penalties.
The EDD also has many penalties for the failure to timely file quarterly and annual returns. In addition, the EDD also has stiff negligence penalties and civil fraud penalties.
If the EDD shares audit information with the IRS there will be much larger tax assessments as well as IRS level penalties.
As you can see, both the EDD and the IRS can get even with Obamacare violators in very tough ways. It is much better to comply with the Obamacare and attempt to avoid it. I find that people who attempt to avoid their payroll tax obligations, either to save money or to be more economically competitive, are always looking over their shoulder for the tax man and waiting for the other shoe to drop.
©Robert Schriebman 2012.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure", both published by Commerce Clearing House.