AB-5 Exemptions: Your Comprehensive Guide
California Assembly Bill 5 (AB5) has built-in exemptions for many businesses. We say “Not So Fast”! Even exempted industries have to adhere to the old 13 point Borello criteria for classifying 1099 contractors. So, while many business owners are celebrating the free pass the AB-5 exemptions seem to offer, take a step back and review the 13 points to ensure your 1099 contractors are still correctly classified.
Assembly Bill 5 (AB-5), “The Gig Work Bill” fundamentally changed the way hiring companies must think about worker classification. The wrong choice can mean thousands of dollars owed to IRS, EDD, and CA State entities for back payroll taxes, worker’ compensation, fines, and fees.
AB-5, which went into effect on January 1, 2020, impacts how companies classify workers and how those companies manage and verify workers who are currently recognized as 1099 contractors. The new rules tighten the definition of independent contractors and require employers to examine 1099 contractors from 3 key facets, “The ABCs” to determine whether or not their workers should be reclassified as full-time W-2 wage-earning employees.
In the past, the rules were lengthy (click here to view our infographic relating the old Borello 13 point criteria to the new ABCs of worker classification) However, since January 1, 2020, the new ABCs of worker classification are the standard and many business owners are viewing their workforce in a new light.
The intention behind AB-5 is to prevent employers from taking tax shortcuts as well as to protect workers who do not choose to work part-time or be a part of the gig economy. 1099 workers do not earn benefits such as health insurance, PTO, and unemployment insurance. The exchange is that they do set their own hours and determine their own rates for services provided. Many employers have classified workers as 1099s to avoid additional W-2 wage earner costs. Because of this, CA EDD is on the lookout for misclassifications.
- Doctors, surgeons, dentists, podiatrists, psychologists, or veterinarians performing professional or medical services provided to or by a health care entity;
- Lawyers, insurance brokers, architects, engineers, private investigators, or accountants;
- Securities brokers/dealers or investment advisers and their agents and representatives registered with SEC, FIRA, or State of CA
- Real estate agents, repossession agencies, direct-sales persons, commercial fishermen;
- Individuals performing services under a contract with a licensed “motor club.”
Professional Services Exemptions*
- marketing professional
- human resources professional
- travel agents
- graphic designers
- graphic artist
- fine artist
- freelance writer
- barber or cosmetologist
- payment processing agent
- IRS licensed tax professional
Referral Agency Exemption
- graphic design
- event planning
- minor home repairs
- home cleaning
- furniture assembly
- animal services
- dog walking
- dog grooming
- web design
- picture hanging
- pool cleaning
- yard cleanup
Construction Industry Exemption *Construction is a particularly challenging area for exemptions take care
- Subcontracts must be in writing and the subcontractor must be properly licensed
- The subcontractor must be “customarily engaged in an independently established trade”—like a carpenter, plumber, or electrician
- The subcontractor must be licensed by the Contractors State License Board
- *NOTE the additional requirements for the construction industry exception
- The subcontractor must maintain a business location, separate from the hiring entity
- The subcontractor must be free to hire and fire its own workers
- The subcontractor must assume financial responsibility for mistakes in written warranties or indemnity agreements, or as evidenced by insurance or bonds
- Special restrictions apply to truck services
The team at Milikowsky Tax Law has resolved over 300 EDD Audits/ Investigations for business owners in California. If you have multiple contractors and fall into an exempted category, or if EDD has reached out to you regarding an audit, call our EDD experts today to review your case.