5 More Misconceptions about the EDD
Recently, I shared with you five misconceptions about the California Employment Development Department (EDD) and whether workers are considered employees. The EDD conducts California state payroll tax audits (commonly referred to as an EDD audit) when a San Francisco 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. Here are five more additional misconceptions* about when an individual is an independent contractor or an employee.
1) If I issue an Internal Revenue Service (IRS) Form 1099-MISC, then the worker is an independent contractor.
NOT TRUE. An IRS Form 1099‑MISC is simply a method the government uses to track and report certain types of nonemployment income. When you provide an IRS Form 1099‑MISC to a worker for payment of services, it does not automatically make the worker an independent contractor.
2) If I pay a worker less than $600 in a year, then the worker is not subject to California payroll taxes.
NOT TRUE. The amount paid to a worker is not, by itself, a factor in determining whether a worker is an employee or independent contractor. The amount paid to a worker may determine if you should issue an IRS Form 1099‑MISC. F
3) If a family member works for me, he/she is not an employee.
NOT TRUE. Family members working for your business are employees and subject to California payroll taxes unless certain conditions are met.
4) 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.
5) My worker has a city business license and business card, so the worker is an independent contractor.
NOT TRUE. A city business license and business card, by themselves, do not make a worker an independent contractor. All of the common law factors need to be reviewed and weighed with respect to the specific circumstances of the services provided by each worker.
Classifying employees and independent contractors can be confusing. And if it’s not done correctly, your San Francisco business could face an EDD audit. 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.
