ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – SHOULD YOU OBTAIN AN ADVANCED WORKER STATUS RULING FROM THE EDD? – PART 2
By Robert S. Schriebman
An employer may seek an advanced ruling from the EDD concerning the proper status of a worker. The employer may wish to treat the worker as an independent contractor and wants a blessing from the EDD just in case there is an audit in the future. Over the years, several clients have sought my advice on whether or not they should apply for an advanced ruling on worker status issues with both the IRS and the EDD. I have consistently advised them not to do so because of my belief that these types of rulings expose an employer to an audit. I still hold fast to this belief. If you are seeking an EDD advanced ruling, you may contact the EDD’s Taxpayer Assistance Center at 1.888.745.3886. You may also complete EDD Form DE 1870, but the last revision of this form occurred in 2018 and has not kept up with either AB-5 or AB-2257. In this series of articles, I will review key questions asked in the application form and give you my opinions to what exposure you may have to a possible audit. If you are audited, the responses you gave in the application form may be used against you. This is Part 2 of several series that will discuss the worker status questionnaire.
Questions and Answers
Questions relating to helpers.
There are several questions in DE 1870 that discuss workers and their helpers. It is not clear from the wording in the form whether the EDD considers helpers to be employees of workers. In this respect, I do not advise answering any questions that are vague. In my experience whenever an EDD auditor sees reference to “helpers” they automatically classify them as common law employees. When it comes to the construction industry, I have seen EDD auditors conclude that helpers are required to have contractor licenses! Most helpers do menial labor such as cleanup, or fence work. None of these workers are required to be licensed. Most helpers are transitory and are paid very little. They are usually day laborers. Since most are paid less than $500 per job, they come under the “small jobs” rule. This means they are not required to be issued a W2 or 1099 and the issue of their status is not relevant.
Questions relating to workers.
The questionnaire deals extensively with questions relating to worker status such as the following:
- Do the workers work for others?
- What percent of the workers’ total working time is spent working for others?
- What percent of the workers’ total income is earned from others?
These are difficult questions to accurately answer. What is an employer to do? Confront the worker? Follow the worker around? What a person earns from others or the services performed should be irrelevant to seeking a status determination on what that worker does for the applicant-employer. These questions are also potential traps.
List the kind and value of tools, equipment, and facilities furnished by the entity. List the kind and value of tools, equipment, and facilities furnished by the workers.
EDD auditors place great emphasis on the value of tools and equipment owned and used by workers. If the investment is minimal, that worker will be considered an employee. However, I have also seen EDD auditors reclassify a contractor as an employee regardless of the value of tools and equipment owned by that contractor. Tools and equipment also include a vehicle owned and used by the contractor.
List any expenses connected with the services of the worker. Who was responsible for paying these expenses? Was the worker reimbursed by the entity for any of these expenses?
Most EDD auditors do not deal with expense reimbursements to those receiving 1099s. This is especially true in the construction industry. I have been told by higher ups in the EDD that, as a rule of thumb, an auditor should allow an average of 30% for reimbursement of tools, equipment, and inventory. Most auditors pay no attention to any issues of reimbursement. Here you must be proactive and insist that adjustments be made for out of pocket expenditures incurred by those receiving 1099s.
This is Part 2 of several series that will examine an EDD advanced ruling questionnaire. Whatever you put down in writing today, may haunt you in the future. I am personally opposed to anyone seeking this type of advanced ruling. You are better off seeking competent counsel and being protected by the attorney-client privilege especially when it comes to exposing yourself to a potential audit.
In the final installment I will discuss the importance of a worker being licensed or certified and I will also discuss several “statutory” employees that cannot be treated as independent contractors.
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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