Just the Facts: 5 Common EDD Misconceptions
The California Employment Development Department (EDD) conducts California state payroll tax audits (commonly referred to as an EDD audit) when a business has classified a worker as an independent contractor instead of an employee. This means the EDD can personally assess the San Francisco business owner for “unpaid” payroll taxes because the EDD has determined that they believe these workers are actually employees. There is quite a bit of confusion among taxpayers and business owners about whether certain workers are employees or independent contractors. Let’s look at five common EDD misconceptions*.
1) My competitors treat their workers as independent contractors; therefore, it is okay for me to treat my workers as independent contractors.
NOT TRUE. The law defines employment relationships, not you or the actions of your competitors. If you misclassify your workers as independent contractors, the EDD may assess you for the unpaid payroll taxes for any unreported employees.
2) The part-time, temporary, probationary, and substitute workers I employ are day laborers or casual laborers, not employees.
NOT TRUE. An employee may perform services on a less than full-time permanent basis. The law does not exclude services from employment that are commonly referred to as day labor, part-time help, casual labor, temporary help, probationary, or outside labor.
3) My worker and I have signed a written contract intending to make my worker an independent contractor.
NOT TRUE. A written contract or agreement does not necessarily depict the actual relationship. The actual practices of the parties in a relationship are more important than the wording of an agreement in determining whether a worker is an employee or independent contractor.
4) My worker performs similar work for other businesses, so the worker is an independent contractor.
NOT TRUE. Performing similar work for other businesses is not, by itself, a determining factor. The relationship the worker may have with the other businesses is not a controlling factor when determining the worker’s status as an employee or independent contractor with your business. The working relationship with each business is looked at separately.
5) I pay my workers solely by commission; therefore, they are independent contractors.
NOT TRUE. The method of payment is not, by itself, a determining factor. All of the common law factors need to be considered and weighed to determine whether a worker is an employee. If the worker is an employee, then all remuneration for services (salary, hourly pay, piece rate, commissions, bonuses, stock options, vehicle, etc.) is wages.
Classifying employees and independent contractors can be confusing. Don’t try to navigate the waters yourself, even if you think you understand the specifics. The best thing you can do to protect your business is to speak to a San Francisco tax attorney with experience in EDD audits.
*Misconceptions provided by the State of California Employee Development Department Information Sheet
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.