Independent Contractor Agreements
Many California payroll tax issues with the Employment Development Department (EDD) arise from disputes on the improper treatment and classification of employees and independent contractors.
Employers will occasionally misclassify employees as independent contractors in order to save on payroll taxes. If the EDD suspects employees are being misclassified, it will conduct an audit of the employer.
The EDD has 23 factors it uses to determine if a worker is an independent contractor or an employee. The most primary factors for determination are how much direction and control the employer has over the work function of the contractor. For example:
- Factor 2-Training of a worker by an experienced employee working with him or her, by correspondence; by required attendance at meetings or by other methods, is a factor of control indicating that the employer wants the services performed in a particular manner.
- Factor 7-The establishment of set hours of work by the employer is a factor of control.
- Factor 11-The submission of regular oral or written reports indicates control since the worker must account for his or her actions.
- Factor 19-The employer exercises the control through the ever-present threat of dismissal, which causes the worker to obey instructions.
If the EDD auditor determines there is control by the employer over the independent contractor, the decision will usually result in a reclassification to employee. If a contractor is reclassified as an employee, the employer will be responsible for back employment and withholding taxes for at least the three previous years.
An EDD audit on the classification of workers can end up being extremely costly to an employer. Do not go it alone. The knowledgeable and experienced tax attorneys of Brown, PC can help guide you through the audit process. We represent clients in Los Angeles and throughout California. To discuss your case with one of our experienced state tax attorneys, please contact the firm online or by calling 424-252-1100.