The next step that the EDD takes in a California payroll tax audit is that they go through and they verify 1099 workers. They’re going to go through each 1099 worker in detail. Even with businesses that have a category of 1099 worker or even if the 1099 is not actually a worker, it’s issued to a landlord or something like that. But you can basically count on the state going through in painstaking detail and going through each 1099.
What they’ll do is they’ll go 1099 by 1099 and then they will verify whether the 1099 was issued to, what they consider a legitimate business. They’re going to look for evidence that your contractors are holding themselves out in an independent business capacity. They’re going to look for a website, they’re going to go to Yelp, they’re going to go on The Secretary of State’s website. They’re going to look for any information that they have. Auditors do use social media, if they have any Facebook page or a Twitter account, or an Instagram account, they will go to that method as well.
In addition, for individuals that are 1099’d, auditors are going to LinkedIn and looking at their LinkedIn profiles. Also trying to pull any other evidence of professional credentials or any other criteria that they had they may establish them as an independent working professional. Consequently, they’re also looking for evidence that would link them to the subject company as an employee versus as an independent contractor. As a practitioner, when you’re going through and you’re looking at your 1099s, you want to do a social media check and a LinkedIn check to make sure that they’re not reporting themselves as being employed by XYZ Company.
With most companies, as long as they’re a legitimate business they’re going to pass the 1099 test. It’s very rare that you would have a situation with a company that has been 1099’d unless there is a very flagrant circumstance or something that just doesn’t make sense that the EDD is going to go back to try to classify that company or the officer of that company as an employee.
Occasionally, you’ll have situations where employers, not under the advice of this council. But we’ll go through and have their workers set up dummy corporations and issue payroll through dummy corporations. In those circumstances, the EDD will look through their corporation. Not seeing any evidence that they’re a legitimate business and will try and assign wages to the subject officer and collect payroll tax on that. But for the most part, any 1099s that are issued to corporations, so long as they’re legitimate, are going to be glossed over.
Now with individuals, they’re going to really look at this in a lot of scrutiny because this is the focus of the state’s compliance effort, is they want to go after individuals who are being 1099’d and really look at whether these people are independent contractors or not. With that said, there are several job categories that I can think of and that I’ve had experience with audits. Where a 1099 individual is working as a legitimate business.
We have music industry professionals, like people who do recordings, and things like that, who are 1099 workers. We have car salesmen who are 1099 people. We have hairdressers. We have all sorts of occupations that I could think of, dietitians, physical therapists, where you have a person who is not holding a business trade name, who is operating as an individual, but still running a legitimate business. It’s those cases that you’re going to have the most problem with ahead of time.
What the EDD is going to do is they’re going to interview most of the 1099 workers that are listed as individuals. If there are a large number of them, then they’ll take a sample and go based on the sample interviews. Really what they’re going to look to do initially is figure out what the job category of each 1099 contractor is. They may pull a sample out of that. But they’re going to basically try and lump all your people into a box and say, “These people are salespeople. These people are professional services people, these people are– whatever.”
Within those categories, that’s where your fights are going to be. The goal is to win the category and to win the worker and to get all the workers to remain 1099 and 1099 workers. You want to make sure going through and doing your prep on each of the individuals that they have as much ammunition to assert themselves as independent businesses. Because they are going to go through an interview process. The EDD is looking for how much control the employer has over the employee so to speak. They’re also going to look at whether or not the 1099 contractors duties are essential to the business generating revenue.