I want to talk briefly with dealing with independent contractor and Payroll Tax audits in general about the application of PIT which stands for personal income tax. When dealing with the payroll tax audit, there is a portion of the liability that it’s owed, it’s associated to the PIT. It is the portion of personal income tax, the employer withholds for the employee and gives over to the state. Now, in any payroll tax liability assessment, there is always going to be a portion of that that is devoted towards PIT and then I supposed to represent the contribution that the employer made on behalf of the employee.
If the employer can substantiate the PIT, the fact that the employee paid over that portion of the personal income tax, then the employer will have that portion of their liability abated. This is common in 1099 cases. For example, if I 1099 somebody for a $100,000 and $15,000 is due to the EDD then if I can show that the worker paid that $15,000 on their personal income tax return or if they will certify that for me, then that will be abated from the assessment.
PIT abatements are a useful strategy to use when I’m whittling down payroll tax liabilities. You always want to examine the PIT portion of the liability. You want to particularly examine with respect to your officers and shareholders who that liability may factor into. You want to whittle that PIT pet down to the extent that you can. That’s a really easy way to make some big gains in payroll tax odds is to look for the PIT potion of the liability and figure out how much you can get rid of just by going back and proving the tax was paid.
The next thing I’d like to talk about is the material claim for refunds in the context of the payroll tax audit. If you are in a situation where you are in the payroll tax audit and you think that there is going to be a refund due, what you want to do is you want to file a DE 1977, which is a claim for refund. It’s a protective claim for refund. That allows you to continue working the audit while protecting your claim for any overpayment of tax to the employment development department.
Now, the important thing to note is that your claim for refund isn’t going to be the entire amount of tax or at least the entire amount of tax that is refunded to you is not going to go entirely to you. The employee portion of it that the employees contributed that is refunded to you needs to go back to the employees. That is a statutory requirement and it’s something you’re not allowed to keep the money that your employees are essentially contributing.
The timeframe for a claim for refund is generally three years from the last day of the month when the overpayment was made. This is shortened in cases where is a levy. For example, if there is a delinquent returned that as filed or there’s an outstanding return, the return is not filed. The EDD comes in and makes an assessment. That assessment is over the amount owed, and the client is levied. Then even if the client can later prove that the client shouldn’t have paid that amount, the client only has six months from the date of the levy to file a claim for refund. That’s a really important deadline to be aware of. Six months for a levy and three years for a self-filed return. You want to keep those to deadlines in mind when filing claims for refunds, if you believed in overpayment to the EDD has been made.
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