ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD “COMMON MISCONCEPTIONS” – PART 1
By Robert S. Schriebman
The EDD has issued Publication DE 231A entitled, “Common Misconceptions.” The publication sets forth 10 statements setting forth specific propositions. The EDD then responds to each published proposition as “not true.” In reviewing this publication, I am of the opinion that the EDD, for the most part, did not offer an insightful explanation and in most cases did not fully develop its response. In this series of articles, I will set forth each proposition, the EDD’s response, and my own opinion. I feel that more information is necessary in order to give you real-world points of view.
When is an individual an employee?
EDD position: “An individual is an employee when hired by an employer to perform services and either (1) the law defines the worker as an employee (statutory employee) or (2) the employer has the right to control the manner and means by which the worker performs his/her services (common law employee).”
Bob’s response: In every business relationship, there has to be some element of control. But the “control” that requires a worker to be treated as an employee pursuant to CUIC § 621(b) is control over the details of the job as opposed to the control of the outcome. EDD auditors are programmed to automatically find a worker to an employee if the auditor sees any element of control at all. Any perceived control is deemed fatal. This is why the Supreme Court of California has issued several decisions over the years trying to establish objective guidelines to determine the nature and extent of control over the details of the work to be performed. If you look at AB-5 and AB-2257, you will see that both bodies of law refer the reader to the Borello case for guidelines.
If I issue an Internal Revenue Service (IRS) Form 1099-MISC, then the worker is an independent contractor.
EDD’s Position: “NOT TRUE. An IRS Form 1099-MISC is simply a method the government uses to track and report certain types of nonemployment income. When you provide an IRS Form 1099-MISC to a worker for of services, it does not automatically make the worker an independent contractor.”
Bob’s Response: The EDD’s position, on the surface, is basically correct. However, the issue of whether a worker is an independent contractor is a battle that has been going on continuously for as long as I have been in practice – and that’s a long time! The IRS for years has had its famous 20-factor test and the EDD’s version is a 23-factor test. Once more, a worker can be treated as an employee for IRS purposes, and the EDD can ignore this reality and reclassify the worker as an employee for EDD purposes – talk about a mess! On its face, a 1099 standing alone does not mean much, especially a 1099 that is issued in the worker’s name with a Social Security Number as opposed to a 1099 issued to a business entity with a Federal EIN. This latter format tends to be honored by the EDD auditor most of the time.
If I pay a worker less than $600 in a year, then the worker is not subject to California payroll taxes.
EDD’s Position: “NOT TRUE. The amount paid to a worker is not, by itself, a factor in determining whether a worker is an employee or independent contractor. The amount paid to a worker may determine if you should issue an IRS Form 1099-MISC.”
Bob’s Response: This situation comes up a lot when dealing with the construction industry and the audit of a general contractor. The Labor Code §2750.5 clearly provides that any unlicensed subcontractor must be treated as a W2 wage earner. But there is a rule known as the “small jobs” rule. If a worker receives $500 per year or less it does not matter whether that person is licensed. The contractor is free to treat that worker as an independent contractor. Most EDD auditors either do not know about this rule or chose to ignore it and reclassify the worker as a W2 wage earner and assess payroll taxes accordingly.
The part-time, temporary, probationary, and substitute workers I employ are day laborers or casual laborers, not employees.
EDD’s Position: “NOT TRUE. An employee may perform services on a less that full-time permanent basis. The law does not exclude services from employment that are commonly referred to as day labor, part-time help, casual labor, temporary help, probationary, or outside labor.”
Bob’s Response: This is a companion issue to the above proposition. If a day laborer or temporary worker, etc., receives $500 or less per year, it does not matter how that worker is classified. This is a common situation in the construction industry where day laborers are engaged on a regular basis. If the worker receives less than $600 per year, the employer is not required to issue either a W2 or a 1099. Most EDD auditors are either ignorant of the “small job” rule or turn a blind eye to it. Yet, it is a very important factor in providing a defense in an audit situation.
This concludes our discussion of the first four propositions set forth in EDD’s Publication 231A. We still have 6 more to discuss and will deal with them in Parts 2 and 3.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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