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"We Thought All Was Done Correctly"
Harriet was wonderful! One of mother’s friends recommended her. She took care of mother for almost a year. Harriet was here five days a week, six hours a day. Harriet told us she was self employed, an “independent contractor." We assumed she would take care of her taxes. We paid her $450 each week. After mother passed away, we gave her a good reference and she was soon working for another family. About a year later we received a letter from the California Franchise Tax Board. Harriet had applied for state education benefits and reported she had received income from us. The Board’s letter said no income had been reported, no taxes paid, and by California law Harriet was an employee rather than an independent contractor. We were therefore responsible for the employer’s payroll taxes, plus penalties. A month later a similar letter arrived from the IRS. Furthermore, we learned that even if Harriet had been an independent contractor, California and federal tax laws require that we report her earnings.
LESSONS WE LEARNED:
As employers, we were required to:
- Report wages when starting, then quarterly to the State of California
- Pay employer’s Social Security contribution
- Withhold employee’s Social Security contribution
- Withhold State Disability Insurance contribution
- Pay Unemployment Insurance
- Provide workers’ compensation coverage
- Keep records of hours worked and compute pay by the hour
- Pay at least $8.00 per hour for all hours worked
- Collect and forward voluntary withholdings for state and federal taxes
UNPAID TAXES AND PENALTIES
Total compensation paid, 48 weeks. . . . . . . $21,600
Federal Income Tax . . . . . . . . . . . . . . . . . . . . 1,519
Social Security . . . . . . . . . . . . . . . . . . . . . . . . 3,735
TFRP 100% penalty for not withholding . . . . . 5,254
(TFRP—Trust Fund Recovery Penalty)
Delinquent Federal tax payment penalty . . . . . . 473
California State Income Tax. . . . . . . . . . . . . . . . 237
Unemployment, Disability Insurance . . . . . . . . . . 671
Workers’ compensation insurance (6.5%) . . . 1,386
Homeowners insurance covered only 1,000 hours
Non coverage workers’ compensation penalty
(minimum). . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Failure to report wage penalty . . . . . . . . .. . . . . 440
Failure to withhold penalty . . . . . . . . . . . . . . . 1,000
Delinquent payment penalty . . . . . . . . . . . . . . . . 227
Underpayment penalty . . . . . . . . . . . . . . . . . . . . 59
Failure to keep time records . . . . . . . . . . . . . . 2,200
Total Taxes and Penalties . . . . . $ 18,201
Hourly equivalent—wages, taxes, penalties $27.64/hr
These are estimated taxes and penalties based on EDD and IRS publications. Contact your tax advisor for a professional opinion.
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