ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD “COMMON MISCONCEPTIONS” – PART 3
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.
My worker performs similar work for other businesses, so the worker is an independent contractor.
EDD position: “NOT TRUE. Performing similar work for other businesses is not, by itself, a determining factor. The relationship the worker may have with the other businesses is not a controlling factor when determining the worker’s status as an employee or independent contractor with your business. The working relationship with each business is looked at separately.”
Bob’s response: At the time of this writing, we are in a transition period. The EDD will be auditing the years preceding AB-5 and AB-2257 effective in 2020. The EDD is currently auditing the years 2018, 2019, 2020 and 2021. Worker status will be determined by a combination of the old and the new. Gradually audits will shift more from the old way of looking at things into the exemptions provided by the new laws and the Borello case.
Working for other businesses is significant. If you can show that the worker holds himself /herself out to the public, this is a very important factor tending to show independence. However, this factor alone is not going to win the day for you. Check to see if the worker has a presence on the web as well as special credentials, a business license, business cards, and presents invoices in order to be paid.
The ABC test brought about by the decision in the Dynamex case will play a role of increasing importance. In a nutshell:
A – Absence of control;
B – Performs services not in the usual course of the employer’s business;
C – Is customarily and historically engaged in a recognized business or profession.
My worker has a city business license and business card, so the worker is an independent contractor.
EDD’s Position: “NOT TRUE. A city business license and business card, by themselves, do not make a worker an independent contractor. All of the common law factors need to be reviewed and weighed with respect to the specific circumstances of the services provided by each worker.”
Bob’s Response: In my opinion, the issue of possessing a business license is a red herring. It has no real meaning in determining whether someone has his/her business. The matter of a business license is an issue that is relevant only to the specific city or municipality involved. Enforcement of business license laws is not within the jurisdiction of the EDD. Many cities do not require a business license; ergo, does this mean the person having a business location in that city is not in business? Having said this, a smart employer will insist that the contractor procure a business license if required. This will help prove a worker has taken a necessary step to objectively prove independence, but at the same time worker status should not rise or fall on the presence or absence of a license.
I pay my workers solely by commission; therefore, they are independent contractors.
EDD’s Position: “NOT TRUE. The method of payment is not, by itself, a determining factor. All of the common law factors need to be considered and weighed to determine whether a worker is an employee. If the worker is an employee, then all remuneration for services (salary, hourly pay, piece rate, commissions, bonuses, stock options, vehicle, etc.) is wages.”
Bob’s Response: In a typical EDD audit, most auditors will jump to the conclusion that a commissioned salesperson is a common law employee. You can clearly see this in the EDD’s position statement above. They do not read or honor their own law! CUIC § 650 excludes from employment direct salespersons. In order for the exclusion to apply all of the following conditions are required.
- The individual must be engaged in a trade or business primarily in sales of consumer products, including services or other intangibles, to be used in the home.
- Substantially all of the individual’s compensation, whether or not paid in cash, must be directly related to sales rather than the number of hours worked.
- The services are performed pursuant to a written contract that specifies the individual will not be treated as an employee for state tax purposes.
CUIC § 13004.1 was added to the code specifically to exempt the services of direct salespersons from personal income tax withholdings when all three of the above conditions are met.
I see quite a few written independent contractor agreements. Some are drafted better than others. One thing I look for that is of prime importance in these types of agreements, has to do with the duty and responsibility for the payment of taxes. It is surprising how many contracts leave out this vital language all together. The EDD recommends the following wording in order for it to bless the contract:
- “The salesperson is an independent contractor and is responsible for paying his or her own taxes.”
- “It is understood that the salesperson is an independent contractor and that no taxes will be withheld.”
This concludes our discussion of the EDD’s Publication 231A. It is impossible for the EDD to fully discuss the complex issues involving independent contractors in a two-page pamphlet. I think the EDD did the best it could to present a nutshell overview. My prognosis for the future is that the determination of a worker’s status is going to have new dimensions brought about by both the pandemic and the rising gig economy as well as AB-5 and AB-2257. We will all be living in interesting times.
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.
Web Site Article 560