Should you consider A new business model to avoid independent contractor misclassification and associated penalties and financial consequences? The rising number of California Employment Development Department or EDD misclassification audits is skyrocketing. The first thing many EDD auditors are asking is simple:
“Do you have any 1099 workers?”
If the answer is “yes” be prepared for an intense and one-sided audit. California isn’t looking for a reasonable business conversation. California is looking for substantial tax revenue and you are the primary target in 2017 and beyond. Why the change? The new economy seemed a perfect fit for independent contractors. The answer lies in a recent United States Supreme Court decision that changed the underlying rules for the classification of independent contractors.
If you wish to avoid independent contractor misclassification you must look at the financial relationship between you and your independent contractors. What percentage of their income comes from your coffers? If an independent contractor earns more than 60% of their income from a single source the EDD will reclassify them as an employee, and the bill for each could quickly exceed $200,000. The civil penalty for misclassification in California is up to $25,000 plus all back wages, payroll taxes, benefits, workers compensation, unemployment and other compensation such as unpaid overtime. These experiences have closed many businesses across the State of California.
The second question is “How are your independent contractors paid?” Do they invoice you separately from their own business entity with a unique Federal ID? Where did the funds come for their start-up and who paid for their business entity creation? If you are paying 1099 workers through your payroll system consider ceasing this practice immediately.
The experienced business and tax attorneys at Allen Barron have decades of experience here in San Diego and across the Southwest helping employers to come into compliance with new federal, state and local regulations regarding independent contractors and 1099 workers. We represent businesses at EDD and IRS audits and defend clients from the onslaught of revenue officers. If you have 1099 workers you probably need to reconsider your business model to avoid independent contractor misclassification and associated financial consequences.
We invite you to contact us for a free consultation at 866-631-3470.