Should You Pre-Interview Your Contacts?
I mentioned that you have to go into the audit meeting with about five references that the auditor is going to interview. It is a very good idea, unless you are rock solid about what these people are going to say, to call them and do preliminary interviews with them.
In our firm, we'll have a senior attorney go through and just do kind of a basic interview about their position and what makes them an independent contractor.
Although you want to be careful to not come across like you are trying to influence their testimony to the tax auditor (big, big problem if you get caught doing this), a casual conversation. The interview should flow something like this:
"Hi, Contractor, so the reason for my call is that I wanted to give you a heads up that the company is going through a payroll tax audit right now, or they're being questioned by the Employment Development Department regarding some of our independent contractor relationships. This does not have any bearing on you (i.e. don’t freak out). Would you mind answering a few questions for us?”
Again, you want to stress to the third party in question, the independent contractor, that this is totally routine because you want them to drop their guard. You don't want them guarded when they talk to you. You want them to be candid and honest.
Here are some basic questions to ask:
- Can you tell us how you found out about the job?
- Can you tell us how many other 1099s you received that year, where you received them from?
- Who are some of the other people you work for?
- Can you tell me whether or not you have your own business?
- Can you tell me what the nature of your work for or with the client is?
- How much do you earn per month? How are you paid?
- Does it vary on a month to month basis?
These are some our examples from our interview template. Obviously, since you might know these people, the conversation might flow somewhat differently. However, we want to stress that, even if you know the answers to these questions, you want to make sure that the information of the independent contractor is matching your story. Plus, it allows you the opportunity to clarify the answers that they are eventually going to give to the auditor and to subtlety synchronize their story to your narrative.
Does a Pre-Interview Really Make a Difference?
We want to caution you. By the time the tax auditor is speaking and interviewing your independent contractors, they could have their mind made up about the case and could use the interview to bolster the position that they have already concluded.
We have had situations in the past where independent contractors will complain to our client that they felt like the auditor tried to put words into their mouth or was twisting things to get them to tell a narrative that was different.
This is why we suggest you do these interviews. It takes no more than an hour to conduct four or five independent contractors' interviews. On average, these should run about 10 minutes.
Get the contractor to open up a little bit about their background. Get them talking and kind of go from there. That's a very good step to take when going through this.
If there are any issues that have come up during the steps, then you at least have a reference point and do not walk into any ambushes later on in the California payroll tax audit process.