Employers in California are facing a significant adjustment to how and when they report their payroll taxes. The state recently announced that businesses must file returns quarterly instead of annually, as was the case through 2010. They’ll do so beginning with the April deadline using two new forms. We spoke with Lorraine Bodden, a state and local tax expert who is director of employment tax at McGladrey, to get a better sense of the change’s impact on California small businesses.
“This is obviously very burdensome to most small employers,” Bodden says. “Their job, their role, is to focus on what they do best: The service that they’re bringing to the community. Payroll reporting and these ancillary reporting responsibilities are never something that they’re focused on at all.”
The first potential problem, according to Bodden, is that some small businesses might not know about the change. “One of the complaints that we’ve gotten from many of the smaller companies that we deal with is the fact that they weren’t even aware that this change had even taken place,” she says. “Right off the bat, they’re potentially non-compliant.” That could mean financial penalties for employers that sit down later this year to file what they assume are routine annual forms. “That’s a huge concern,” Bodden says.
California’s economy is the largest of any state in the union by a wide margin, and the eighth largest in the world in terms of GDP, sandwiched between Italy and Russia in the world’s top 10. It was home to more than 700,000 small businesses as of 2006 — representing more than 99 percent of all employers in the state — according to the SBA’s most recent profile.
Additional paperwork is another key part of the change: California businesses need to get to know two new forms — DE 9 and DE 9C — and file them four times as often. While the new forms have no direct impact on an employer’s tax rate — they simply require the filer to reconcile what they owe more often — Bodden says there’s a possible tax hike waiting for unsuspecting businesses.
“If they fail to timely report, or they are non-compliant for any reason because they didn’t understand that this reporting requirement had changed, that could create a penalty for them, and their unemployment tax would potentially increase,” Bodden says.
An FAQ section on California’s Employment Development Department (EDD) website includes a basic question about how quarterly payments will impact employers. The answer: “The new quarterly reporting process will allow the [EDD] to identify overpayments sooner, which will result in faster refunds, as well as allow us to more quickly identify potential delinquencies.”
Bodden speculates that one possible motivation for the EDD to switch to quarterly filing, given the recent recession, was to reduce its exposure to revenue loss as a result of failing businesses. “The first thing they tend not to pay is the payroll tax if they’re running into trouble,” she says. “That’s obviously money coming in the door that they could use for other things, and unfortunately many times businesses may use that money, and the state or the taxing authority may wind up being the one not getting what’s due to them.”