Ask The California Employment Tax And Payroll Tax Attorney – EDD’s Newest Employment Relationship Questionnaire Form – Potential Traps For The Unwary – Part 1
By Robert S. Schriebman
2020
Introduction
Since the beginning of 2019 I have observed that EDD audits have become more aggressive and intrusive. EDD auditors feel a certain entitlement towards an ever expanding search for documentation and information. Now, as part of the audit process, auditors are demanding that the employer complete a multipage document entitled Employment Relationship Questionnaire. This is a 5-page form containing 37 questions many of which have subparts. Perhaps the EDD has become empowered by the 2018 California Supreme Court Dynamex decision, the essence of which has now been enacted as AB-5. In my opinion, the EDD has an ongoing agenda of questioning corporate officers and LLC management members for future personal-level assessments.
CUIC § 1735 allows the EDD to disregard the corporate or LLC protections and hold responsible individuals personally liable for every dime assessed against the corporation or LLC. The other agenda is to require the employer to admit control over the functions performed by 1099 recipients.
In this Part 1, I will review those portions of the new Questionnaire that are red flags that will certainly trip you up during the audit process. Questions that are basic to the audit process will not be discussed.
Your Job During the Audit Process
It is always wise, in most relationships, to be as cooperative as possible. But in an EDD audit unchecked cooperation can lead to huge assessments and a potential economic disaster waiting to happen. CUIC § 2105 is the operative code section that demands employers provide the EDD with the necessary and proper documentation and information to complete the audit. Having said this, there is no requirement and no duty on your part to do the auditor’s homework.
It is the auditor’s job to review relevant documentation and information. This includes verification of W2s and 1099s to original books of entry and to determine proper worker status. This usually requires the auditor to investigate the working relationship through written or oral interviews with 1099 recipients to determine control factors under Borello and AB-5. Part of the investigatory process does not mean requiring the employer or the representative to do the auditor’s work. As I reviewed the Employment Relationship Questionnaire, I was struck by the literal chutzpah of the person or persons who put this questionnaire together. Requiring the employer to do the auditor’s homework, strikes me as a form of slavery that went out with the 13th Amendment.
Let’s review those portions of the Questionnaire that I found disturbing and that gave me great pause.
Let’s Review the Questionnaire
Questions 1 – 4(a): These several questions are rather basic but they were already answered in the Pre-Audit Questionnaire. In that sense they are a duplication and the auditor already has this information. You are not obligated to provide it. Again, the exception is 4(a) requesting a copy of a written contract between the employer and the service provider.
Question 4(b): “If the agreement was not in writing, describe the terms and conditions of the agreement.” Samuel Goldwyn was famous for his comment on an oral contract. He said that it was not worth the paper it was written on. Most oral agreements do not have terms or conditions. In my opinion this question is silly and vague.
Question 6: this question relates to whether you have knowledge of the worker’s relationship with individuals working under his/her direction and control. If the EDD wants this information let them interview the worker or service provider. You are not required to know the intricacies of anyone’s business. Indeed, that relationship is none of your business. You should not be required to do the auditor’s homework.
You should only be required to provide a brief description of the services provided by the 1099 recipient.
Question 7: this question concerns your knowledge of whether a service provider held himself out to the general public to provide similar services. The EDD also wants you to state, “What percentage of the individual total working time was spent for others?” Another question, “What percentage of the individual total income was earned from others?” These questions require you to pry into someone else’s business. This is not your responsibility.
Question 8: Who owned or rented the premises where the services were performed? An easy question if the services are performed on your premises, but it’s not such an easy question when the services are offsite. This is especially true in the construction industry where work is always performed offsite. The same can be said for janitors and tutors. You are neither competent nor are you required to provide title information on someone else’s property.
Question 9 – 9(d): These questions concern the costs of tools and equipment. The first question asks the cost for the tools and equipment you provided. However, the rest of the questions want you to provide answers to the cost incurred by the worker and others. If the EDD wants this information let them interview the service provider. This is not your responsibility.
Questions 10 – 10(e): These questions concern the nature and extent of out of pocket costs for advertising and promotion. You are asked to provide this information for the service provider including whether the service provider was required to have a license or certificate. It is not your job to provide this information.
There are occasions when assembling licenses and certificates will prove that the service provider is highly skilled and in business for themselves. This is the only time you should provide this documentation. The exception would be providing copies of CSLB licenses as a necessary requirement to prove subcontractors were properly licensed.
Conclusion
In Part 2 we will examine the remainder of the information sought by the EDD they want you to provide. We will also take a brief look at questions aimed at specific industries including home workers. This has become important under AB-5 because there is a specific provision requiring that home workers be treated as W2 wage earners.
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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 40 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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