ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – SHOULD YOU OBTAIN AN ADVANCED WORKER STATUS RULING FROM THE EDD? – PART 3
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 final part I will discuss categories of workers deemed employees by law. There are limited exceptions that will be discussed below.
Form DE 1870 list 6 categories of workers who are by law deemed to be employees. The only exception to the strict classification is for the worker to show that he/she has a substantial investment in business-related assets including tools and equipment. Vehicle ownership, together with its related expenses, does not count as a substantial investment. Having said this, AB-5 and AB-2257 do provide for a business-to-business exception. For example, a sole proprietor must have a business license and show objectively that they provide services to the public in general. There must also be a written contract between the parties.
Agent-Driver or Commission-Driver
An agent-driver or commission-driver engaged in distributing food products, such as meat, vegetables, fruit, and bakery products. This driver operates his/her own truck or company truck and also includes drivers who solicit their own customers. The new rules under both AB-5 and AB-2257 provide a business-to-business exception. There must be a written contract between the parties. See § 2776 of AB-2257.
Traveling or City Salesperson
This exception applies to salespersons who work on a fulltime basis in the solicitation of orders from wholesalers, retailers, contractors, or operators of hotels and restaurants. The orders solicited from these businesses are for merchandise for resale or supplies for use in their business operations. There are exceptions for commission-salespersons who solicit customers for goods used primarily in the home. In order for this exception to apply there must be a written contract between the employer and the salesperson. See CUIC § 650(a).
Domestic Home Worker
This exception usually applies to live-in domestic workers; a live-in nanny would be considered a statutory employee. The exception does not apply to domestic service providers who clearly have their own business and serve the public in general, such as independent housecleaning services and gardeners; these would be considered independent contractors.
Author or Creative Artist Working for Hire
An author or artist who is under a written contract to provide creative services for an employer will be considered a statutory employee especially when the parties agree in writing that the services shall be considered a ‘work made for hire,’ and the employer obtains ownership of all copyrights. Both AB-5 and AB-2257 contain exceptions for authors and creative artists. The laws are complex and should be studied very carefully. See § 2778 of AB-2257.
A Member of a Limited Liability Company (LLC)
A member of an LLC that is treated as a corporation for federal income tax purposes will be treated as a statutory employee.
These are old rules that have not changed with the passage of AB-5 and AB-2257. These new statutes basically echo the wording in Labor Code § 2750.5. If the subcontractor is not licensed, there is a conclusive presumption that an employer-employee exists.
Services Excluded by Statute from Employment
The following categories of workers may not be treated as employees:
- A child under the age of 18 in the employ of his/her parent.
- An adult in the employ of his/her child.
- Spouses working with each other.
- A student under the age of 22 enrolled in a fulltime academic institution and performing services for credit in a qualified work-experienced program; hioweverhowever, there must be withholdings of personal income taxes.
It must be kept in mind that Form DE 1870 is behind the times. A wise move would be to review AB-2257 to determine if the many exceptions to the “ABC Test” applies to your situation. Those who are classified under statutory employee rules, most likely should not attempt to seek an advanced ruling from the EDD unless one can clearly demonstrate a substantial investment in his/her business excluding expenses associated with vehicle ownership.
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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