ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – NEW EDD AUDIT GUIDELINES FOR 2022 AND BEYOND – PART 5 – THE ABC TEST – STATUTORY EMPLOYEES AND STATUTORY NON-EMPLOYEES
By Robert S. Schriebman
A wise person once observed that the only thing certain is this life is change. We see change in virtually everything and everywhere we look. This maxim has never been more accurate when applied to matters of taxation. The treasuries of both the Federal government and the State of California have taken heavy hits since the pandemic began. Governments are looking for money and are directing their taxing agencies to be more aggressive in both the assessment and collection processes.
The first 4 parts of this series discussed the elements of the ABC Test, AB-5 and AB-2257, and the Borello case. Our emphasis concentrated on who could be regarded as an independent contractor. Having said all this, it is important for you to know that there are several categories of workers who cannot be treated as independent contractors under the law. Instead, these workers must remain fixed in stone as employees. Also, there are categories of workers, also fixed in stone, who are not employees under the law. Let’s look at both categories of workers.
An Employee Under All Circumstances
The following list of workers are not considered to be employees under either the ABC Test or Borello. They are a part of an older network of statutes deeming them to be employees under the law:
- An officer of a corporation or an LLC. These include a president, a vice president, CEO, CFO and secretary. This is a favorite target area for auditors. Violations are common in the construction industry. All too often we see corporate officers taking draws out of the company and not receiving either a W2 or 1099. This is fertile ground for several harsh EDD penalties. Another common error is issuing corporate officers only 1099s. There are however, a few rare cases of note where it is proper for a corporate officer to receive both a W2 and a 1099 in the same year.
- An agent-driver or commission-driver engaged in distributing meat products, vegetable products, fruit products, bakery products, beverages (other than milk), or laundry or dry-cleaning services for his or her principal.
- A traveling or city salesperson working on a full-time basis, and taking orders from wholesalers, retailers, contractors, or operators of hotels and restaurants.
- A home worker manufacturing piece goods and working with materials furnished by the employer.
- An author providing services under a work-for-hire contract. Both AB-5 and AB-2257 have created exemptions for authors and artist. These rules are complex and must be studied carefully.
- An unlicensed subcontractor working for a licensed general contractor pursuant to Labor Code § 2750.5.
Services That Are Not Deemed to Be Employees and Are Not Deemed to Be Independent Contractors.
The following workers are in a gray area – neither employees nor independent contractors. However, personal income taxes (PIT) must be withheld from their compensation. (UI, SDI, and ETT taxes do not have to be withheld.)
- Family members – children under the age of 18 employed by parents
- A parent in the employ of a child.
- One spouse working for another (also applies to a domestic partner).
The above exemptions apply only to family members working for either a sole proprietorship or a partnership. If working for a corporation or LLC, a W2 must be issued if services are $600 or more per year.
- Students under the age of 22 enrolled full time in an academic institution and performing services for work experience credit. (PIT must be withheld.)
- A commissioned salesperson working pursuant to a written contract, or a licensed real estate salesperson working for a licensed broker.
We are only beginning to see the impact of the ABC Test as the EDD has only been dealing with audits since 2020. We have a long way to go and we are all in for a learning process – follow the yellow-brick road.
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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