If you have 1099 workers in San Diego you might want to revisit the relationship between your company and those independent contractors. The State of California and federal agencies like the IRS are taking a close look at all employers who have 1099 workers in San Diego looking for misclassified employees. A landmark case in the US Supreme Court recently reset the standard between a true 1099 independent contractor and an employee. If a federal or state agency is able to establish that 1099 workers are actually “employees” your business will be exposed to heavy civil fines of $25,000 per employee as well as back payroll taxes, benefits, unemployment, workers compensation and other costs. Recent cases have resulted in awards exceeding $100,000 per worker for those who were earning $38,000 to $50,000 a year.
The crucial issue is the financial relationship between your company and the 1099 worker. If 1099 workers in San Diego earn more than 60% of their income from your business it is highly likely that the US Department of Labor (DOL), EDD, FTB or IRS will “reclassify” them as employees resulting in a heavy financial burden for your business. The experienced tax and business attorneys at Allen Barron advise our clients on the new standards and how to come into compliance with new 1099 regulations.
“They’ll never come after us, we’re too small!”
This is the mistaken assumption which many San Diego business owners make. It’s too easy for the EDD to identify your 1099 workers at the routine tri-annual audit (every 3 years). The first question the EDD is asking is “Do you have any 1099 workers?” They will reference your tax returns and ask to look into the financial relationship between your company and any 1099 workers in San Diego as well as nature of the business entity the 1099 worker has established. The first question is simple: Do you pay your 1099 employees regularly through the payroll system? If so, you will need to change the process of payment. External vendors (including 1099 workers) should always provide an invoice, and you pay off of that invoice.
How long have your 1099 workers been associated with your business? If it is longer than six months be prepared to become engaged in a misclassification audit. We invite you to contact us or call today for a free consultation at 866-631-3470 to discuss the recent changes in California and federal law, and to ensure that your company is not exposed to the heavy financial burden of misclassified employees.
