Can I hire employees as independent contractors to save money on taxes in California? What are the requirements?

Hiring Independent Contractors in California

In California, hiring employees as independent contractors to save money on taxes is not recommended. The state has strict requirements for classifying workers as independent contractors, and misclassification can result in significant legal and financial consequences for employers.

Requirements for Independent Contractor Classification

To classify a worker as an independent contractor in California, the employer must meet all three of the following requirements:

1. Behavioral Control: The employer must not have control over how the worker performs their job. This includes the employer not providing training or instructions on how to complete the work.
2. Financial Control: The worker must have control over their own finances, including the ability to set their own rates and the method of payment.
3. Relationship: The worker must not be performing work that is integral to the employer’s business. Additionally, the worker must have a written contract that outlines the terms of their work.

Potentially Allowable Post-Hire Costs and Expenses to be Itemized and Disclosed

If you do hire independent contractors, you may be able to itemize and disclose certain costs and expenses to the worker. According to 8 CACR Section 13873, contractors must identify and disclose to a worker any and all costs or expenses, including amounts, if any, charged to the worker while working in the state, including for items listed in B&P Code section 9998.2.5, as long as these costs, expenses, or deductions are customarily assessed against similarly-employed workers in the United States and permitted under governing state and federal law.

Qualified Wages

If you are looking to save money on taxes, you may be eligible for the Joint Strike Fighter Wage Credit. However, this credit only applies to qualified wages paid to qualified employees, not independent contractors. According to 18 CACR Section 17053.36-4, qualified wages are defined as that portion of wages paid or incurred by the qualified taxpayer to qualified employees that are direct labor costs, as used in Internal Revenue Code section 263A and defined in the regulations thereunder, included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter.

Consequences of Misclassification

Misclassifying employees as independent contractors can result in significant legal and financial consequences for employers. Employers may be required to pay back taxes, penalties, and interest, as well as provide benefits and protections to misclassified workers.

Conclusion

In conclusion, it is not recommended to hire employees as independent contractors to save money on taxes in California. Employers must meet strict requirements for classifying workers as independent contractors, and misclassification can result in significant legal and financial consequences. If you are looking to save money on taxes, you may be eligible for the Joint Strike Fighter Wage Credit, but this only applies to qualified wages paid to qualified employees, not independent contractors.

Jurisdiction

California

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