You may be familiar with or have heard of a twelve-factor test or a three-factor test or a lot of different tests that the EDD supposedly uses to classify independent contractors.
Through my years of professional experience and time spent in a lot of California payroll tax audits, I will just tell you that a lot of this stuff is bogus.
Audits of independent contractors essentially come down to two things:
The California payroll tax auditor is going to look at the relationship between the worker and the employer in detail. The auditor will look to see how much dominance the employer has, whether the negotiating platform is equal or whether it is tilted towards the employer.
You must keep in mind that the independent contractor rules are put into place in order to protect employees who are being classified, or misclassified as 1099 workers to avoid payroll taxes.
If there is a level of control that the employer has over the worker, then they're also going to be classified as a W2 employee versus a 1099 contractor.
Knowing all this going in, you can start to build your case.
Here is essentially how we build an argument in a California payroll tax audit:
If you start having people that you feel less than confident about in a bucket, you may concede the bucket which will give you some credibility at the audit level.
The EDD will try and make a determination by job category rather than by individual worker.
The more you bolster you case for each job category and the more job categories look independent, the more success you are going to have in your California payroll tax audit.
You want to figure out what your best facts are and you are going to try and present those facts and minimize your bad facts.
Presenting your arguments in terms of the two-factor test that we just discussed usually maximizes your success in an audit.
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Last updated: May 29, 2023
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