State Enforcement

WHAT YOU SHOULD KNOW...

In the war on independent contractors, individual states are leading the way. Here's how:

IRS / State Reciprocity Program

Some states are more aggressive in the area of independent contractor compliance than the IRS. In May 1980, the IRS and the states started developing a reciprocal liaison with each other. Under this agreement, once either the IRS or a state has audited your company, that information is then passed to the other tax authority for investigation.

Applications for Unemployment / Worker's Compensation

The single most common trigger for an independent contractor audit is an unemployment claim made by a departing or former independent contractor and second is a worker's compensation claim. Any successful claims will not be covered by your company's current unemployment or workers compensation policies. A claim by one independent contractor within a state, usually triggers the investigation of all workers in similar positions within the state.

Worker Classification

Other items you should know about your state's enforcement of worker classification:

1. The definition of employees varies from state to state, but is generally less restrictive than the factors used by the IRS. Know your state's test for "Independent Contractor vs. Employee" status.

   Example:
   The California state tax department is the EDD (Employment Development Department) and it has an eleven question test on publication DE 573 Rev. 8 (10/94) that defines their test on independent contractor status.

2. States are not bound by the Section 530 Revenue Act of 1978 and do not recognize
   Safe Harbor.