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The IRS FTB and EDD are Targeting 1099 Worker Misclassification

If you are a San Diego employer with any 1099 workers take heed.  The federal government including the US Department of Labor (DOL) and the IRS, as well as California’s Employment Development Department (EDD) and Franchise Tax Board (FTB) are targeting 1099 worker misclassification for audit.  There are many roads into your business that could lead to an expensive and in some cases business ending scenario: Employee misclassification audit.

The US DOL hired 700 new auditors this year whose sole purpose is to conduct 1099 worker misclassification audits.  The DOL has stated:

“The misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy.”

The IRS has recently estimated that millions of workers have been misclassified by their employers as 1099 workers or independent contractors.  The State of California is right behind them.  The EDD has stated:

“When employees are misclassified as independent contractors, they lose rights afforded by laws designed to protect workers and may not have access to employer-provided health insurance coverage and pension plans.”

California wants additional tax revenue.  California desperately needs to raise tax collections, and the misclassification of independent contractors is their number one target for revenues.  California estimates it is owed $7 Billion per year in lost payroll tax revenue alone.  For each worker the EDD or FTB determines to be misclassified, San Diego employers will pay a civil fine up to $25,000 as well as years of unpaid premiums for worker’s compensation, unemployment, healthcare premiums, retirement and pension matching, payroll taxes and all benefits offered to present employees.  In addition, the independent contractors can and will bring additional claims or lawsuits for unpaid overtime.

How will federal and state agencies targeting 1099 worker misclassification select you and your business for an audit?  Yes, you personally and your company.  Quite easily – the EDD audits every San Diego business every three years.  The first evaluation point in that audit is a review of all 1099 workers.  It’s simply a matter of time.  If any of your workers submits a complaint to the US Department of Labor or the California Labor Board you can expect an audit or action to immediately follow.  The IRS is using the issuance of 1099s to target businesses for audit as well.  A simple electronic “sort” within the IRS business return records separates out those with 1099 workers and these audits have substantially increased in the past two years.

Allen Barron’s tax attorneys backed by our accounting and tax divisions are uniquely positioned to advise San Diego employers with 1099 workers.  The rules for the qualification of independent contractors have substantially changed in the past 18 months.  If you have 1099 workers we invite you to contact us or call today for a free consultation at 866-631-3470.  The likelihood of a California audit or an IRS audit is exceptionally high.  Your next EDD regularly scheduled audit is the most likely starting point for most businesses.  Are you protected against federal and state agencies targeting 1099 employee misclassification and associated penalties and financial outlays?