ASK THE EDD ATTORNEY – THE EDD AND THE STATUTORY EMPLOYEE PART 1
By Robert S. Schriebman
September 14, 2016
This is Part 1 of a two-part series that will discuss the classification and treatment of so-called “Statutory Employees” by the EDD. In this article we will discuss when corporate or LLC officers are Statutory Employees. We will also take a brief look at the differences between the IRS and EDD versions of Statutory Employee classifications.
Are Corporate or LLC Officers Statutory Employees?
Many employers who are audited by the EDD get into trouble because they treat statutory employees as independent contractors. This is especially true when it comes to the treatment of corporate or LLC officers. There seems to be some confusion in the work force about how to classify officers of small corporations and LLCs. It is a mistake, for the most part, to treat a corporate or LLC officer as an independent contractor. The safe bet is to classify corporate and LLC officers as employees, i.e. W2 wage earners.
The EDD code paints a broad picture when it comes to the treatment of corporate officers. CUIC §13004 defines employees. The section states in part, “”Employee” also includes an officer or a corporation.” As far as EDD auditors are concerned a corporate or LLC officer is an employee regardless of circumstances.
The IRS rules are a bit more flexible. An officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, isn’t consider an employee. A director of a corporation isn’t an employee with respect to services performed as a director (see IRS Publication 15-A Employer’s Supplemental Tax Guide, a Supplement to Pub. 15, Employer’s Tax Guide). But this is not a written law is not set in stone.
There are a few cases, very few, where a corporate officer is a hybrid. That is he or she is an employee for some functions and an independent contractor for other purposes. I read a case years ago where a corporate officer of a radio broadcasting company was considered an employee during his administrative activities during normal business hours. After hours and on weekends he sold advertising for the radio station and received a 1099 for these services. The court held that he was treated properly. He received both a W2 and a 1099.
Another confusing issue is the worker status of an unlicensed subcontractor who has been hired by a licensed general contractor. We will discuss this later in Part 2.
Statutory Employee – EDD vs. IRS
The IRS has four categories of statutory employees. The EDD has at least eight. What is the difference between the two taxing agencies?
- IRS Statutory Employees
A statutory employee is one created by statute, i.e. law as opposed to a common law relationship. For IRS purposes, the common law is set forth in the famous “20-Factor Test.” The EDD has a “27-Factor Test.”
The following job descriptions are IRS statutory employees:
- Drivers and Distributors of Food Products A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
- Life Insurance Sales Agents A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
- Piece-Good Workers An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
- Salespersons A full-time traveling or city salesperson who works of your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity. (IRS Pub. 15)
If you are audited by the IRS and the agent determines that you have treated any of the above worker classifications as independent contractors you will owe the IRS for back payroll taxes for the past three years. While the IRS bill is relatively higher than an EDD assessment for these workers, the IRS will assess a lower percentage of tax and will not charge penalties or accumulated interest. (See IRC § 3509) That is a break you do not get from the EDD.
- EDD Statutory Employee
The EDD has more statutory employee categories than the IRS by almost twice as many. The specific categories of statutory employees are set forth in CUIC § 621(c) with the exception of artists and authors. Those rules are set forth in CUIC § 601.5, 621(d) and 686.
Statutory employees include workers performing services for a individual or entity (the principal) in a continuing relationship as follows:
- Drivers And Distributors of Food Products 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/her principal. Refer to CUIC §621(c)(1)(A)
- Salespersons A traveling or city salesperson, other than an agent-driver or commission-driver, engaged upon a full time basis in the solicitation on behalf of, and transmission to their principal (except for sideline sales activities on behalf of the same person), of orders from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments for merchandise for resale or supplies for use in their own business operations. Refer to CUIC §621(c)(1)(B).
In Part 2 we will discuss the remaining categories of statutory employees under the EDD laws. We will also discuss the status of unlicensed subcontractors who perform services for licensed general 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 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.
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