ASK THE EDD ATTORNEY – WERE YOU REALLY AN INDEPENDENT CONTRACTOR? HOW TO BE PREPARED FOR THE WORKER INTERVIEW QUESTIONNAIRE – PART 4
By Robert S. Schriebman
July 7, 2016
If you are an employer who treats workers as independent contractors, whether properly or improperly, you are at risk for an EDD audit and a possibly an IRS audit as well. This article will deal solely with your exposure to an EDD audit. Many IRS worker-status audits piggy-back onto completed EDD audits.
If you are audited by the EDD you can expect the EDD auditor to contact the workers that you treated as independent contractors. This contact can be done in several ways. It is common fr the EDD auditor to ask for contact information such as a worker’s address and telephone number. Most likely the auditor will call the worker and conduct a telephone interview. Sometimes the EDD auditor will send out a postcard asking the worker to contact the auditor. It is a common practice however, for the EDD auditor to send out a questionnaire asking the worker to answer the questions and return the questionnaire to the auditor. This method is gaining in popularity with EDD auditors. This is why I am writing this series of articles to alert you to the questions that will be asked. If there is something that you are currently doing that may expose you to a risk of an EDD assessment, this article may help you correct your ways. What may help you avoid or minimize an EDD assessment may also help you minimize your exposure to an IRS audit.
This is Part 4 of a several part series of articles dealing with EDD’s probing questions set forth in the Worker Interview Questionnaire to determine if the worker was truly an independent contractor. The EDD obtains the list of workers from any one or more of several sources such as 1099s, Employer Interviews, General Ledgers, or referrals from other interviewed workers.
At this point in our discussion it is very important that you are made aware of certain ground rules regarding the EDD’s attempt to solicit information from current and former workers. First, it is illegal for an employer or anyone else to advise a potential interviewee not to answer these questions. This can lead to criminal prosecution. Never tell anyone that he or she should refuse to talk to the EDD. Former workers as well as current workers are witnesses in an EDD audit. A witness does not belong to anyone. Second, no one is legally obligated to answer any questions unless ordered to do so by a judge.
If you are being interviewed by the EDD with regard to the questions presented in this article, be sensitive to any EDD caller who is trying to get you or your workers to answer any questions in a specific way. Always answer any question honestly and in your own words. Do not let anyone put words in anyone’s mouth.
Questions Relating To Initial Employee/Contractor Status Continued
The EDD has written a questionnaire structured in such a way as to conclude that just about every service-providing independent contractor should be treated as a W2 wage earner. While the following questions seem to be straight-forward, they play into an agenda that is designed to have an auditor conclude that the independent contractor has been misclassified.
Did you hold yourself out to be in business in any way?
Bob’s comment: In an EDD audit, one of the factors that draws the attention of the auditor, like a moth to a flame, is to find a 1099 form issued in the name of an individual with a social security number as oppose to a 1099 form issued to a fictitious name (DBA) with a federal EIN. The latter may get a “thumbs-up” from the EDD auditor where the former will get a “thumbs-down.” If you fail to issue a 1099 you will be in a world of hurt.
The lesson is clear: an independent contractor must hold himself or herself out to the public to be in business. Business cards, invoices, websites, and even old fashioned yellow page advertising are indicia of self-employment. Ideally the worker should have at minimum a DBA and even better should be incorporated or have an LLC. A city business license should be obtained where required. Some cities, however, do not always require one to be licensed.
If you want the minimum insurance that your business relationship will be respected by the EDD, you must insist the worker take these very important minimum steps towards showing independence.
Did you have a fictitious name statement?
Bob’s comment: A DBA is cheap and easy to get. Insist that your workers take this step as well as obtaining a federal IRS Employer Identification Number (EIN). Avoid issuing a 1099 in the worker’s name and social security number. If the worker fails to take these minimum steps, every EDD auditor I know is going to jump to the conclusion that the worker is a common law employee.
Did you have business cards? If yes, who provided them and what is your title on them?
Bob’s comment: Business cards are a must! So are invoices. So is a public presence such as a website, social media, business license and federal EIN. In my practice I have found that a listing on LinkIn does not have the impact that a website has.
Did you incur any expenses while working for the employer? If so, what kind and were you reimbursed?
Bob’s comment: Reimbursed business expenses play an important factor in determining independent contractor status. Of course employees can have reimbursed and non-reimbursed employee-related business expenses and still remain employees. Business expenses play an important role especially in the construction industry. An EDD auditor will automatically classify an unlicensed subcontractor as a common law employee and will assess payroll taxes on the gross amount stated on the 1099. What the auditor fails to take into consideration is the substantial amount paid out for tools and supplies. For example, a tile subcontractor may have huge expenses for product, saws, and other equipment expended on the project. It is your responsibility to reduce the assessment by pointing out to the EDD auditor that not all of the 1099 gross amount is for labor. It is very important for you obtain an invoice from the subcontractor setting out out-of-pocket costs relating to the job.
Were/Are you performing services exclusively for the employer? If no, what percentage of your work time was spent performing services with the employer?
Bob’s comment: Generally speaking, an independent contractor works for others during the year. This is a clear sign that one is in business independently. If a worker works exclusively for one employer the EDD will conclude the worker to be an employee. However, in rare circumstances, especially involving extensive and complex engagements, a worker may work on one job for an entire year. There are also circumstances where the volume of work from one employer can absorb all of a contractor’s time especially if the business environment is friendly and profitable.
There are many more questions contained in the EDD Worker Interview Questionnaire. While some questions appear to be simple and straight-forward, other questions carry great potential harm and risk of assessment. In our next article, we will continue our review of the Worker Interview Questionnaire.
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.
Web Site Article 230