ASK THE EDD ATTORNEY – THE GIG ECONOMY AND THE EDD – SOME LATE NIGHT THOUGHTS – PART 1
By Robert S. Schriebman
This is Part 1 of a two-part series that will take an overview of the gig economy. People in the entertainment industry refer to an engagement as a “gig.” In the economy the term gig refers to a sharing of services within a specific industry. People are traditionally hired on a short-term basis for artistic and technical skills. This is referred to as a gig economy. The past few years the categories of short-term workers have increased. One of the most familiar new-era gigs are Uber and Lyft drivers. I recently read a series of articles originating in Europe whose authors believe that the entire European economy is becoming a gig-based economy. These European authors believe that a gig economy is a wonderful thing for Europe. I am not convinced that it will work in our economy as traditional worker status world views are deeply entrenched in both the California economy and the structure of worker classification issues within the IRS.
Here in California the EDD seems to be at the forefront of attempting to blunt the growth of the gig economy. Why? Employers engaged in worker sharing treat workers as independent contractors. This treatment resembles manufacturers who pay contractors by piece work or job basis. The EDD is concerned with the potential loss of revenues because employers are not paying payroll taxes on gig workers. The EDD is also concerned with gig workers filing claims for unemployment benefits when they run out of work or when they are between jobs.
The worker sees the gig economy through a different lens. The gig worker is treated as an independent contractor. On the one hand it is always good to be working and the worker enjoys receiving compensation without withholdings taken out of the paycheck. But in the long run, is this such a good thing? When the dust clears, gig workers tend to receive compensation that is less than the minimum wage. The gig worker is not entitled and does not receive employee benefits, such as sick pay, vacation pay, health insurance, or retirement plan benefits. The employer benefits at the gig worker’s expense. Company profits rise, dividends are paid to shareholders, and payroll taxes are minimized.
Here in the USA well respected commentators have also entered the debate and have recently published studies on the gig economy in the USA. Let’s review one of these commentaries and how it dovetails with EDD concerns.
IRS and EDD Issues Relating to the Gig Economy
On September 7, 2017 a special report was prepared by Commerce Clearing House (CCH). CCH happens to be the largest publisher of information and documentation issued by the US government, including the IRS. I have had a wonderful and long-lasting relationship with CCH as an author of many of their books on taxation and IRS practice and procedure. The CCH report is broken down into topics including “Income Recognition,” “Employee vs. Independent Contractor,” and “Filing/Payment Requirements.” Let’s take a brief look at some of the issues raised under these topics.
Is a gig worker required to report the income he/she receives from the “gig?” When I was a young law student, introduced to my first law school course on taxation, the first things we were taught was the distinction between “realizing” and “recognizing” income. We were also taught the definition of income according to the Internal Revenue Code (IRC). The rules are stated in IRC § 61. This section states that “gross income means all income from whatever source derived.” A gig worker “realizes” income or an increase in assets when compensated for services. Does the worker have to “recognize” this wealth increase by reporting it on a tax return?
The definition is vague, but section 61 sets forth 15 categories of receipts including “compensation for services, including fees, commissions, fringe benefits, and similar items.” This is rather simple when it comes to receiving a paycheck, but gig workers sometimes exchange their services for other services or for goods other than a paycheck. IRC § 61 includes as income goods derived from dealings in property. A barter economy also requires the recognition of income from the value of goods or services received.
Therefore, it would be a mistake for a gig worker not to “recognize” compensation when receiving something other than a paycheck.
From the EDD’s point of view, this issue may come up when a worker seeks unemployment benefits between gigs. The employer, on the other hand, can expect to be taxed on the value of goods exchanged for services other than the issuance of a paycheck. Gig workers filing for unemployment benefits are going to claim that they were employees for the short time they rendered services. The EDD will most likely be sympathetic to the worker, give them unemployment benefits and audit the employer to determine if other workers have been improperly classified as independent contractors.
Employee vs. Independent Contractor
The CCH study does not spend a great deal of ink discussing worker status issues. Most of what is written in the study is old news. The issue of control is still of prime importance in the relationship. The more control exercised the greater the chances are that the gig worker is an independent contractor. There really is nothing on the CCH study that you have not already read in other articles on this website. The study does state that according to Federal Interstate Income Tax Law (P.L.86-272) out-of-state businesses cannot be taxed by the EDD if independent contractors are making sales or maintaining an office in California on behalf of the out-of-state business. However this does not preclude the EDD from challenging the worker status of the independent contractor.
I cannot imagine that the EDD has no concerns about the worker status of gig workers treated as independent contractors. It is my opinion that the EDD is going to be mount challenges to gig workers, in all walks of life, because when a gig worker suffers, the California economy likewise suffers. The EDD is not going to permit companies to line their pockets at the expense of workers whose futures are bleak because they are not receiving basic employee benefits and are not making enough money to provide for themselves or their families.
In Part 2 we will examine filing and payment requirements including the requirements to issue W2s and 1099s.
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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