ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD “COMMON MISCONCEPTIONS” – PART 2
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.
If a family member works for me, he/she is not an employee.
EDD position: “NOT TRUE. Family members working for your business are employees and subject to California payroll taxes unless certain conditions are met.”
Bob’s response: The EDD’s position leaves out some very important rules relating to minors. CUIC § 631 excludes from the term “employment” service performed by a child under age 18 in the employ of his or her parent.
My worker and I have signed a written contract intending to make my worker an independent contractor.
EDD’s Position: “NOT TRUE. A written contract or agreement does not necessarily depict the actual relationship. The actual practices of the parties in a relationship are more important than the wording of an agreement in determining whether a worker is an employee or independent contractor.”
Bob’s Response: The EDD’s position is basically correct, but does not tell the whole story. The real issue is whether the EDD gives recognition to a written independent contractor agreement. I have seen very well drafted contracts prepared by competent and experienced attorneys that were totally ignored and set aside by the EDD during the audit process. This is why it is important to realize that there is no such thing as an iron-clad bullet-proof independent contractor agreement that will pass muster with the EDD. For this reason, I have consistently refused requests to draft these types of agreements.
As if to aggravate an already unfair disregard of a written agreement, auditors will commonly assess stiff penalties in addition to disregarding the terms of the agreement. The most common penalty is the 15% negligence penalty assessed pursuant to CUIC § 1127.
My competitors treat their workers as independent contractors; therefore, it is okay for me to treat my workers as independent contractors.
EDD’s Position: “NOT TRUE. The law defines employment relationships, not you or the actions of your competitors. If you misclassify your workers as independent contractors, the EDD may assess you for the unpaid payroll taxes for any unreported employees.”
Bob’s Response: The IRS has had for a long time its famous 20-factor test. The EDD’s version is a 23-factor test. Both versions set forth as a key factor the treatment of workers in the employer’s industry. If the employer’s treatment of a worker as an independent contractor is consistent with the treatment of the same worker throughout the industry, this is a strong factor tending to prove that the employer has acted correctly under the law. The real problem is neither the law nor is it the IRS or EDD factor tests. The real problem comes rests with the auditor. I have yet to see an auditor honor this factor. The treatment of a worker in the industry is totally disregarded when it comes to an audit. Only a judge will be in the position to recognize and bless how that worker is treated.
This concludes our discussion of the second set of propositions set forth in EDD’s Publication 231A. We still have 3 more to discuss and will deal with them in Part 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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