If your business faces a California tax issue it is important to know an Employment Development Department or EDD payroll audit will be followed by an IRS audit and vice-versa. The tax agencies communicate directly with one another to maximize reciprocal tax revenue. Therefore it is important to keep in mind that any settlement with one agency will directly impact your tax exposure with the other two. The most common issue facing California employers at this time is the misclassification of employees as independent contractors. One of the first question an EDD auditor will ask you in the normal three-year cycle audit is “do you have any 1099 employees.” Another way this issue can come to light is a complaint from an existing 1099 worker to the EDD or the US Department of Labor (DOL).
The designation standards for deciding the question of “employee” or “independent contractor” have substantially changed over the past few years. The IRS (and therefore the State of California) are using a much more detailed profile to identify misclassified employees. The questions will focus upon the nature of the financial relationship between you and your 1099 worker and their company, as well as the nature of the work performed and the duration of the relationship. For example, one question is the percentage of your 1099 worker’s income which comes from your business. If a 1099 worker earns more than 60% of their income from your company be prepared for a brawl with the IRS or EDD. The work of an independent contractor should require a special license or professional certification or some other form of specialize knowledge. If the work performed by a 1099 worker can be accomplished by any of your employees, the tax agency will raise a classification issue. This also extends to the nature of the 1099 worker’s corporate entity. How and when was it formed? Where did the initial investment for this entity come from and does the 1099 worker have the right to establish pricing and affect profit and loss? In the end, an Employment Development Department or EDD payroll audit will be followed by an IRS audit and vice-versa.
The experienced California and IRS tax attorneys at Allen Barron are prepared to represent you in an audit by the Franchise Tax Board, EDD or IRS. Our integrated legal, accounting and tax preparation services compliment the experience and expertise of our tax attorneys. It is important to realize an EDD payroll audit will be followed by an IRS audit, and any changes to an IRS return will be communicated directly to the EDD and FTB. It is important to seek the representation of the experienced tax, legal, accounting and business professionals at Allen Barron to represent and protect your interests in an audit and to ensure a seemingly harmless settlement with one agency won’t open you up to a large tax bill with another. We invite you to contact us or call 866-631-3470 for a free consultation. Learn how the integrated services and extensive California, IRS and international tax expertise of Allen Barron can save you time, money and exposure to financial penalties that can cripple or challenge the life of your business.