Independent Contractor and Employee Worker Reclassification Audits
Either the EDD or the IRS can examine a business' returns for proper worker classification. The determination of whether a worker is an independent contractor or an employee is a fact-based determination which involves a variety of factors, with some factors often weighing more than others. The EDD provides a handy "Employment Determination Guide," Form DE 38, to guide differentiating between employees and independent contractors. The EDD form suggests that the answers to the following questions are helpful to telling the difference between these workers:
1. Do you instruct or supervise the person while he or she is working?
2. Can the worker quit or be discharged (fired) at any time?
3. Is the work being performed part of your regular business?
[Yes answers to the above 3 support employee status.]
4. Does the worker have a separately established business?
5. Is the worker free to make business decisions which affect his or her ability to profit from the work?
6. Does the individual have a substantial investment in their job which would subject him or her to a financial risk of loss?
[Yes answers to the above 3 support independent contractor status.]
7. Do you have employees who do the same type of work?
8. Do you furnish the tools, equipment, or supplies used to perform the work?
9. Is the work considered unskilled or semi-skilled labor?
10. Is the work considered unskilled or semi-skilled labor?
11. Is the worker paid a fixed salary, an hourly wage, or based on a piece rate basis?
12. Did the worker previously perform the same or similar services for you as an employee?
13. Does the worker believe that he or she is an employee?
[Yes answers to the above 7 support employee status.]
However, determinations are not so black and white in many cases. We have experience in arguing for proper independent contractor classification and convincing the EDD and the IRS to respect legitimate contractor relationships. Although the EDD and the IRS will suggest that determinations are year-to-year and independently made with respect to each worker, simply accepting an incorrect worker reclassification proposed by the EDD or IRS can have lasting implications. As noted above, the fact that you have other persons working in the same function classified as employees will weigh in favor of employee classification for all workers in that category. Tax attorney Daniel W. Layton can fight the IRS and the EDD to protect your business' right to retain legitimate contractors without assuming ongoing tax liabilities and other liabilities inherent to mistreating them as employees.
Not under audit yet but concerned about proper classification of workers? Mr. Layton can advise you how to properly classify your workers and to keep proper records to support the proper determination in the event of an audit. In the event there is concern that contractors have been misclassified, one option that may be considered is the IRS's disclosure program, the "Voluntary Classification Streamlined Program." That program has the following eligibility requirements under the IRS's guidelines, IRM 126.96.36.199.1 (4/22/14):
1. A taxpayer must have consistently treated the workers as non-employees and must have filed all required Forms 1099 for the previous three years to participate in the VCSP. In addition, the taxpayer cannot currently be under an employment tax audit by the IRS (Announcement 2012-45) and the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.
2. If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit.
3. An SS-8 determination does not constitute an examination and does not prevent a taxpayer from being eligible for the VCSP. However, the IRS retains discretion as to whether to accept a taxpayer's application for the VCSP.
4. Exempt organizations and governmental entities may participate in a VCSP if they meet all of the eligibility requirements.
If you are concerned about a current audit, future audit, or your company's compliance with proper worker classification requirements, you may contact tax attorney Daniel W. Layton to schedule a consultation at (949) 301-9829.