Let the Hirer Beware: Casual Labor Is Taxed : State Employment Office Can Be Inconsistent in Its Advice, Survey Discovers

Instead of hiring day laborers who wait on street corners around Los Angeles, Val Holwerda, owner of Bristol Press in West Los Angeles, frequently called the Santa Monica branch of the California Employment Development Department for help.

In 1987 and 1988, when she first opened the business, Holwerda hired more than 100 different casual laborers, paying them about $26 a day to move boxes, put up shelves, collate papers, sweep floors and perform other tasks.

“I felt it was simpler to do it the right way by calling the state, rather than paying people illegally under the table,” said Holwerda, a former copywriter and publicity director for major department stores.

But, to her surprise, Holwerda now faces a $3,500 to $4,000 tax bill for state payroll taxes she was supposed to pay for the day workers. And she is waiting to hear from the Internal Revenue Service regarding the federal taxes she may owe.

Holwerda is angry because she insists that she asked several different state job service workers about the tax ramifications of hiring the casual laborers. And, she said, if she had been aware of the need to put each one on the payroll, she would have just hired one person instead of several.

“I was told by several Employment Development Department people, ‘Just pay them in cash--petty cash--and as for taxes--forget it,’ ” Holwerda recalled. “They said these guys are just day workers.”

It appears that Holwerda is not the only small-business owner who has been told not to worry about paying taxes for casual laborers. A recent informal phone survey by The Times found that employers who call EDD branch offices in Hollywood, central Los Angeles and other areas are still often told to pay the workers in cash and not to worry about taxes.

Several EDD tax auditors said there has been a long-running battle between the department’s tax and job placement sections over the payroll tax information provided to potential employers.

Now, the problem has been brought to the attention of the Employment Development Department’s tax chief.

“I became aware of this issue about a month ago and took steps to communicate with the operations branch,” said Karl Grossenbacher, EDD’s deputy director.

Grossenbacher said the department is preparing a memo to job service staff members reminding them that they should refer all questions about payroll taxes to the tax division and not provide any tax information themselves.

Grossenbacher said employers with questions should feel free to call the tax offices and get the correct information, even if they prefer to remain anonymous.

“Our general theory is most employers want to do it right, because they don’t want the hassles of doing it wrong,” Grossenbacher said.

Many Misinformed

He said employers do not have to pay payroll taxes if they pay someone less than $50 in one three-month period to do something unrelated to their business purpose. For example, a shop owner who hires a man to wash the shop windows on a one-time basis would not be responsible for payroll taxes. Most other arrangements between an employer and an employee require paying taxes to cover disability insurance, unemployment insurance, employment training fund expenses and personal income tax withholding.

Richard Camarillo, supervisor of the employment tax division in the Santa Monica branch office, said he is “aware of inconsistencies” in the tax information being provided to employers by the job placement workers in Santa Monica.

Although he declined to discuss the specifics of Holwerda’s case, he said many small-business owners are misinformed about state payroll tax laws.

“I think the employer community goes to the wrong source for tax information,” said Camarillo. “If they talk to the wrong person, they will get the wrong information.”

He said employers believe that it is “completely burdensome” to put people on the payroll who work only one or two days, but nonetheless the law makes the employer ultimately responsible for paying the taxes.

That explanation, however, doesn’t diminish Holwerda’s complaint.

Several calls to EDD labor desks in various locations revealed a lack of consistency. One day last week, the person answering the phone on the labor desk at the Central Los Angeles branch said employers usually pay the day workers in cash. When asked specifically if employers were responsible for payroll taxes, he said: “No, no, you don’t have to pay any taxes.”

Instructed Not to Give Advice

A supervisor in the Hollywood branch said employers are not responsible for the payroll taxes “if you tell them you are hiring them as an independent contractor.” But that isn’t accurate, according to state tax laws.

A woman answering the phone at the South Gate branch said it did not matter how the day workers were paid. She suggested calling the state labor commission or employment tax division for information. “I would hate to give you the wrong information,” she said.

The EDD job service workers are instructed not to provide any tax information because it is beyond their scope of training, said Suzanne Schroeder, EDD spokeswoman in Sacramento.

“Maybe, because the people like to be paid in cash, an employer might think that means you don’t have to pay taxes,” Schroeder said.

Although casual laborers are those who do not work more than three days at any one job, they are handled just like any other job-seeker, Schroeder said.

For the fiscal year ended June 30, Schroeder said, the department placed 41,369 individuals in jobs lasting three days or less. That compares to the 246,793 individuals placed in non-agricultural jobs during the same period.

Like many small-business owners starting out, Bristol Press owner Holwerda said she relied on casual laborers when she couldn’t afford to hire full-time help.

She paid them all by check and kept track of every expense. When she asked her accountant about the tax implications, he told her that she didn’t have to file tax forms until the amount reached $600. However, she later learned that the rule is a federal one applicable only to independent contractors.

Prefers Agencies Now

Holwerda’s tax audit was triggered when she decided to cut back on the work of a free-lance artist she was using regularly. The artist filed for unemployment insurance benefits, claiming that she was a Bristol Press employee. When state officials researched the claim, they found that Holwerda had not been paying payroll taxes for the woman because Holwerda considered the artist to be an independent contractor with a separate business.

In hindsight, Holwerda said she wishes that she had never hired any casual laborers or independent contractors. She now relies on outside vendors or workers supplied by temporary agencies if she needs extra help.