ASK THE EDD ATTORNEY – THE GIG ECONOMY AND THE EDD – SOME LATE NIGHT THOUGHTS – PART 2
By Robert S. Schriebman
This is Part 2 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.
In Part 1, we took a look at issues relating to Income Recognition as well as Employee vs. Independent Worker Status. We learned that the old rules are still very much alive and are being applied by the EDD with vigor. The EDD is going to be slow in granting more latitude for gig employers in not paying worker payroll taxes and not giving gig workers 1099s. Many battles are going to be fought before we see legislation that is going to create a definable and recognizable category exempting both employers and gig workers from payroll tax obligations. In reality gig workers are nothing new. They may be more sophisticated today due to computers and the internet but we have always had short-term engagements and the underground economy. The contractor who picks up day workers on the corner has been engaged in the gig economy for decades.
In Part 1, we began our review of a CCH special study entitled, Sharing (GIG) Economy. We discussed the topics of Income Recognition and Employer vs. Independent Contractor Workers Status issues. In this Part 2 we will continue to review the study by reviewing the Filing/Payment Requirements on both sides of the issue and allowable deductions.
If a gig worker is a true independent contractor, and assuming he/she operates as a sole proprietor, the worker will be required to report income and expenses on Schedule C of a 1040 return (540 return in California) and pay quarterly estimated income taxes. There is really nothing new under the sun here. Those who pay the gig worker are entitled to deduct the payment as an ordinary and necessary business expense.
The EDD is going to continue to evaluate the relationship using its 23-factor test and penalizing employers for payroll tax violations including the failure to file quarterly and annual payroll tax returns. Workers who have been misclassified as independent contractors are going to exercise their rights to employee benefits such as vacation pay, sick pay, and retirement plan benefits. The employer under audit is going to have to vigorously contest the deficiencies set forth in the Notice of Assessment by timely filing a petition with the CUIAB and considering settlement of the audit. Settlements always mean that the employer is going to have to pay the EDD something, but a settlement does not entitle the worker to prior benefits nor is the settlement reported to the IRS.
The gig worker may have ordinary and necessary expenses relating to the various jobs such as, automobile expenses, equipment and supplies, tools of the trade, and even an appropriate home office deductions. An Uber or Lyft driver will be allowed to deduct expenses incurred in vehicle ownership and operation including auto insurance, fuel, repairs and maintenance, but only in the ratio of business use as opposed to personal use. The IRS requires the strict maintenance of a log book that shows the business use of the car, and the mileage. When it comes to tax audits, this is how the IRS disallows auto expense deductions because a contemporaneous mileage log is not maintained. What the IRS does not tell you is that you can create a reproduction of your mileage log at the time of the audit, but this log must be clearly labeled as a reproduction and not represented to the IRS agent that it is an original. Some Uber and Lyft drivers have more than one vehicle. The vehicle used to provide transportation services is solely used for that purpose and not for personal use. This is the best of both worlds.
If the gig worker works out of his/her home it is possible to take a home office deduction for that part of a home solely dedicated to the job. I always advised my client, under audit, to take pictures of the home office and bring it to the audit appointment.
After reviewing the CCH study I came to the conclusion that it may be too early and too vague at this point in time to offer advice specifically dedicated to any specific aspect of the gig economy. I saw very little, if anything, in the study that I have not already experienced in prior tax audits with the IRS or FTB. The EDD has been in combat with the gig economy for decades. The rules worked back then, are still applicable today. There are always going to be issues of control in worker-status relationships. What the EDD needs to understand, and what they seem to ignore as an institution, is the reality that in every business relationship, there is some element of control present. The traditional EDD world view is that the presence of any indicia of control automatically means an employer-employee relationship. This is not how the real world works. What is of key importance is who has the control over the finite details of the job to be performed.
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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