What is one of the highest percentage audits for businesses in California? Allen Barron represents San Diego employers in 1099 independent contractor misclassification audits. The California EDD recently confirmed they have resumed targeting audits for the businesses who employ any of the more than 2 million independent contractors across California.
The focus of federal and state agencies on 1099 workers continues to be one of the highest audit triggers for business clients. The US Department of Labor, IRS, California Employment Development Department (EDD) and the Franchise Tax Board (FTB) are actively targeting San Diego employers with 1099 workers searching for employee misclassification.
Why? What has changed? How will this impact your business strategy for 2021 and beyond?
The “why” is tax revenue. California and the federal government are searching for ways to increase tax revenues and collections. The pandemic has consumed substantial federal resources and made a substantial dent in California state budgets. The State of California needs tax revenue, and the EDD confirms this is a primary source for additional audit revenue.
1099 misclassification is a primary focus for each of the agencies above. The significant change in the basis for defining the nature of the relationship between independent contractors and the companies they work for arose out of a recent US Supreme Court case. The ruling changed the way in which federal and state agencies are to view business and working relationships. The old standards were primarily focused upon the degree of control exercised by the provider of the work. The recent guidelines focus on the economic relationship of the parties, as well as the term of the work.
If your 1099 workers earn more than 60% of their income from your company, you will likely face (and risk losing) a 1099 misclassification audit. The auditing agency will also review the permanency of the relationship and issues relating to the business entity of the 1099 worker and the process of payment for services. If you are paying 1099 workers through your payroll system you are opening yourself up to a finding of misclassification. Outside vendors would invoice you for services rendered, and you would pay them as a supplier.
This may impact your 1099 strategy going forward. Review all 1099 relationships, the nature of the work they perform and the duration of that relationship. Consider the process of payment for these workers and whether you genuinely treat them as a separate entity. Allen Barron represents San Diego employers in 1099 independent contractor misclassification audits as well as tax audits and administrative employment hearings. We invite you to contact Allen Barron or call 866-631-3470 for a free consultation, and to learn more about the impact of 1099 employees on your risk of a California tax audit.