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© Copyright 2001-2011

ATTENTION! FLASH! BULLETIN!  For all California landlords:  here is another reason to liquidate your holdings and move to Nevada.

            Effective 2001, the State of California imposed a new reporting requirement on landlords and all others required to file Federal Form 1099s, regarding their relationships with independent contractors.  Theretofore, a person employing independent contractors had until January 31 of the following calendar year to make such reports.

            Under the new law, if you employ an independent contractor, you must report his existence, and other information, to the Employment Development Department on California Form 542 (see link below) within 20 days of having paid him an aggregate of $600 or more, or entering into a contract that you expect will result in payments of $600 or more.  The only exceptions are if you employ a person acting in his capacity as an employee of a corporation, partnership, or limited liability company.  Failure to comply results in a penalty of $24, and failure to comply with collusion with the independent contractor may result in a penalty of as much as $490.

            According to the California Society of Enrolled Agents, tax professionals licensed by the Federal Government to represent taxpayers and provide a variety of services on their behalf, the stated reason for this new imposition is to provide the government with information on deadbeat parents who are cheating on their child support obligations.  Here are some examples of how it would work in practice.

EXAMPLE 1:  You employ Tommy, the 14-year-old son of one of your tenants, to mow the lawn, pick up papers, and generally clean up your four-plex every Saturday.  For this you pay him $20 a week.  Since Tommy will be paid more than $600 in the calendar year, you must report him on a Form 542 within 20 days of the date he starts, even if you are fairly satisfied he does not have a bunch of children to cheat out of their support.  So much for the stated reason for the new reporting requirement.  You will probably end up swarmed by EDD bureaucrats saying things like “child labor laws.”  After you have served your prison time, you will find Tommy doing honest work selling crack on the street corner where nothing gets reported.

EXAMPLE 2:  You employ Joe, carefully ensuring he is old enough to work after your experience with Tommy, to do some repairs and get an apartment ready to rent in March.  He charges you $450.  Because he has been paid less than $600, and you do not have a regular ongoing contractual relationship with him, no reporting requirements have been triggered.  But, suppose you call Joe back in October to do some additional repairs and pay him $200.  Now, since you have paid him an aggregate of more than $600 for the year, you have triggered the reporting requirement and must file a Form 542 within 20 days.  Keep records of the amounts you pay to independent contractors.

EXAMPLE 3:  You engage Nuclear Rooter, Inc., to do plumbing work at your complex, which amounts to over $1000.  Because Nuclear Rooter is a corporation, and the person who worked on the plumbing is its employee, there is no requirement to report within 20 days.  This exception and the ones for partnerships and limited liability companies are not true exceptions.  You have not actually employed the person who does the work, nor do you pay him.  His employer, who pays his wages and keeps records, does the reporting.  If, however, Nuclear Rooter is a sole proprietorship, it appears you must report, as the government might be after the proprietor.

            There you have it.  You can obtain the relevant form and instructions for filling it out here.  Scroll down to “DE 542 – (7-00)” where you will find three PDF documents pertaining to the reporting requirement.

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Watch Your Contractors!

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