ASK THE EDD ATTORNEY HOW NOT TO GET IN TROUBLE WITH THE EDD–THE BASICS
By Robert S. Schriebman
Mark Twain asked what the difference was between a taxidermist and a tax collector. He answered that the taxidermist takes only your skin.
It is a very competitive world out there. In order to be competitive some start-up businesses elect to treat their workers as independent contractors rather than employees. If wrong, both the EDD and IRS will eventually take the lion’s share of the profits. It is safe to say that if you are new in business and you pay other people to work for you directly or to perform services on behalf of your business you must be very careful that you treat these workers properly for tax purposes. If you treat workers as independent contractors who are in reality employees you can be subject to stiff fines, taxes, penalties, interest, or all of the above.
There is a lot of incompetent advice out there, and some of it may even come from the EDD. Recently a client informed me that he called the EDD to determine if he could treat a worker as an independent contractor. According to the client he was given the green light over the phone. He was audited by the EDD and was given a stiff assessment. The auditor did not care what oral advice he was given by an uninformed EDD employee. Do you remember the famous show business quote by Samuel Goldwyn of MGM, “An oral contract is not worth the paper it is written on.” This is good advice to apply to any oral opinion given to you over the phone by the IRS or the EDD. That EDD or IRS responder is not going to “put it in writing.” Under the IRS Taxpayer Bill of Rights you cannot sue the IRS for improper oral advice. Always get a second professional opinion.
Another myth in this area is that a written contract stating that a worker is an independent contractor is your free pass in any audit. Not so. The EDD manual does not even recognize the existence of a written contract in its twenty-three factors used to determine true independent contractor status. As far as the IRS is concerned, it is only one of twenty factors used to determine whether a worker is or is not an independent contractor. Even a written contract drafted by an experienced employment law attorney may not stand up to the EDD. There are no guarantees.
There are many factors used by both the IRS and EDD to determine true worker status. However, do not be fooled into thinking that if you have more factors on your side than the EDD you will win your audit. This is not a game of marbles, the one with the most factors on his or her side does not always win. The most important factor in determining whether a worker is an employee or an independent contractor comes down to one question, “Does the employer have the right to control the manner and means by which the worker performs his or her services?” Viewed through the eyes of the EDD, any right to control the worker means that worker is an employee. However, appeals decisions have consistently held that in any worker relationship some degree of control must be present. Therefore, control, per se, is not necessarily fatal. The test is vague, and there is no way that there will ever be an absolute black and white test.
Here are a few key factors that the EDD uses to determine whether a worker is truly an independent contractor:
- The work is not highly skilled or specialized.
- The work is usually done under supervision.
- The worker does not have a business license.
- The worker does not have business cards or uses invoices to bill for services.
- The worker is not in a recognized profession – handyman vs medical doctor.
- The worker does not provide tools, equipment, and off-site place of work.
- The work is not separate from the regular work, business, or services provided by the employer. This is known as the integration test.
Remember, when in doubt – get a written professional opinion.
An EDD attorney, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD lawyer, Robert S. Schriebman 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.
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.