In looking at your buckets that you have created, we want to highlight a few other things, which will help defend you in an independent contractor audit. This is based on a few tips and tricks that we have learned over the years based on our experience in EDD audits.
Use EDD Fact Sheets to Your Advantage
First, when we as a firm are dealing with a client that has independent contractors that we feel are questionable, we will check the EDD's website to see if there have been any information sheets or internal guidance published on the industry that we are dealing with.
For example, for casual labor, we know that there is guidance on the issue because we have run into it quite a bit in our practice. What we mean by this is that the state of California has put out a fact sheet on the definition of what casual labor is, and not surprisingly, they classify most of these people as employees. However, you can read through this fact sheet and know what position the EDD auditor is going to take in advance and where the cracks are.
So, if you get a situation where you have a lot of casual labor, you first go to the EDD fact sheet, because that's what the auditor is going to refer to, and then you run a test on those people against what the fact sheet says. That will basically allow you to do a mock audit to see if you think that you have a reasonable position against what the EDD's internal guidance says.
Identify California Statutory Employee Issues and Issues for Family Businesses
The next thing you're looking for is you're looking for situations where people are statutory employees. You'll get instances where people are truck drivers or in other occupations where they are considered statutory employees.
You want to make sure you know that going in, because if somebody has been classified as a 1099 and they’re actually a statutory employee, the tax auditor is going to make you look pretty foolish there.
When you've got a lot of related parties in a business, that is a huge red flag to the EDD like in situations where you have related family members who are operating a business together. It is a cause for concern for the tax auditor because of past abuses in that space.
Not just like one or two people, like a husband and a wife, although that can be a red flag in and of itself, particularly when you have a lot of personal expenses, but when you have got multiple family members in a business.
So, take for example when you have got dad and son running the business and uncles working for it or a couple of cousins in the business. Maybe just smoke and no fire, but be on the lookout for any problems with those relationships.
Look at the Case History for Heavily Disputed or Targeted Industries
Guess what? You are neither the first nor last person to go through a California payroll tax audit. The benefit of this is that many of the issues that you are facing have been fought before, usually many times.
When we start with a client, if we are rusty on the challenges surrounding a particular industry or are dealing with a new issue, we will look for case law or guidance that has been issues in the past.
We are looking for things or worker classification issues that are “hot button” in order to gain insight or to hopefully get some background information on some of the other cases that have occurred in those industries.
What are the hot button issues? Well, we have been through the ropes on most things EDD at this point in our practice, so we are usually on the lookout for newer issues, but for non-tax people, I can go ahead and give you three off the top of my head.
The EDD frequently targets anything involving salespeople, anything involving the construction industry, anything involving the restaurant and hotel industry. Chances are if you are in an industry with a large unskilled labor pool, there is probably an EDD fact sheet on the issue.
So, make sure you look at those issues. Look at some of the case law surrounding those issues and go from there. If you are still asking the question, "Well, how do I know if I have a business with a hot button issue?" Just run through the list of EDD information sheets and if the industry appears on that information sheets, you will find a situation where there is litigation on the case or there's been some sort of internal guidance, and chances are that it may be on-point to your particular situation.