Tag Archive for: cryptocurrency

Right of Control: Who has it and How Does EDD Determine 1099 Status?

When determining whether your workers should be classified as employees or independent contractors, it’s critical to ensure that you are closely following the Employment Development Department’s (EDD) strict guidelines. 

On the simplest level, proper classification is determined by whether or not the principal, or employer, holds the “right of control.”

What is “Right of Control?”

Right of control is determined by who holds the “right to control the manner and means” by which work is performed. 

A corporate administrative assistant, for example, reports directly to an executive who manages their work. Likely they work a classic Monday through Friday, 9 to 5 schedule. When they want to go on vacation, they have to request time off or let their manager know in advance. 

Now consider an app-based rideshare driver. When they’re available to work, they log into the app and begin work. Perhaps after a couple of hours, they decide they need a break, they disable the app and log off for a break. While they are required to abide by the rules and regulations set in place by the company that they work for, their hours and responsibilities are not deliberately determined by the company overall. 

How does EDD determine 1099 status?

EDD utilizes the right of control as an initial way to classify workers. They take things one step further by providing a worksheet that employers can utilize to help clarify discrepancies. 

Since January 2020 the new ABCs of worker classification has been implemented to try to simplify the process of determining worker classification.  Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Since the passing of the AB_5 gig worker bill, there have been multiple rounds of exceptions, exclusions, and widespread confusion about how the rules affect real-life business scenarios.  In cases of confusion, the original 13 point Borello test is still the fallback. 

The questions posed in the EDD Borello criteria include the following 13 elements to provide additional support in determining workers’ proper classification. They include the following: 

  1. Do you instruct or supervise the person while he or she is working? 
  2. Can the worker quit or be discharged (fired) at any time?
  3. Is the work being performed part of your regular business?
  4. Does the worker have a separately established business?
  5. Is the worker free to make business decisions that affect his or her ability to profit from the work?
  6. Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
  7. Do you have employees who do the same type of work?
  8. Do you furnish the tools, equipment, or supplies used to perform the work?
  9. Is the work considered unskilled or semi-skilled labor?
  10. Do you provide training for the worker?
  11. Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
  12. Did the worker previously perform the same or similar services for you as an employee?
  13. Does the worker believe that he or she is an employee?

Answering “yes” to questions 1-3 would provide a strong indication that the worker is an employee. Answering “no” to questions 4-6 would indicate that a worker is not in business for themselves and would likely classify as an employee. Questions 7-13 may indicate important factors to be considered. While answering “yes” to any one of them may indicate that a worker should be classified as an employee, no single factor is enough to determine so independently. 

The full worksheet provided by EDD provides further clarification on certain factors and circumstances. If completing the provided worksheet does not provide sufficient clarification for employers, EDD offers the ability to request a written ruling by completing a Determination of Employment Work Status

In cases where EDD initiates a worker classification audit, employers can be required to retroactively prove that their workers were correctly classified at 1099 contractors vs W-2 employees.  At  Milikowsky Tax Law we are experts in EDD audit defense.  Our team works with you to ensure that your audit does not spread to other areas, that EDD understands the scope and function of your unique business and that you are only liable for back fines and fees on those workers who are indisputably misclassified.  

We have represented hundreds of businesses and individuals audited by EDD, CSLB, CFTB, and IRS. Our team is dedicated to ensuring you get the best result and that your audit does not permanently negatively impact your business or your life. Reach out to our team for more information. 

Why IRS is Redirecting Their Focus Towards Cryptocurrency Tax Evasion

In mid-May, the U.S Treasury Department announced that they would require any transfer of $10,000 or more to be reported to the Internal Revenue Service (IRS). This update comes in response to growing concerns with regard to cryptocurrency compliance. 

While many forms of crypto trading were designed to be hidden or virtually invisible, IRS is far from blind to these transactions. It is suspected that a significant amount of money is laundered through crypto transactions and tax evasion occurs through illegal crypto investing and trading. 

IRS’s initial response to the rise in the use of cryptocurrencies includes training and developing their internal investigative teams to utilize data analytics to trace, identify, and audit suspicious crypto transactions. 

This recent shift in focus towards cryptocurrency violations brings up questions of, “why now?” given that IRS has been defunded and has experienced years of employment shortages, and is currently in a stage of increased recruitment efforts.  Data analytics is hardly a new venture for IRS, it has long been a staple in tracing and audits.  While the blockchain is opaque and there will be elevated challenges around information-gathering, the use of data analytics is the IRS’ best path forward in combating crypto-fraud. 

IRS’s decision to increase its utilization of data analytics tactics comes as an approach to sift through billions of transactions with greater efficiency and ease than they have in the past. This is an ideal response given the previously mentioned employment shortages currently being experienced by IRS. 

Cryptocurrency Growth 

Cryptocurrency continues to grow at an exponential rate. IRS has experienced challenges in keeping up with how quickly the unique industry has grown and evolved over recent years. The implementation of data analytics is a step towards being able to keep up with digital currency, in a way that they have not been able to previously. 

As IRS adjusts to these new processes for tracing and auditing cryptocurrency exchanges, it is predicted that they will be able to increase their success in regulating and addressing the potential of tax evasion. 

Jeffrey Cooper, former executive director of international operations at IRS Criminal Investigation told Accounting Today that it’s a process of ‘follow the money.’ He explained that once money goes into the exchange, they’re able to trace it through data analytics. 

The American Family Plan, put in place by the Biden administration, also helps deal with potential tax compliance issues with cryptocurrency by implementing a new reporting threshold of $10,000. The new reporting requirements will ensure that whatever crypto traders are doing, there will be a clear trail of traceable data to accompany it. 

According to IRS estimates, in 2019 there was a discrepancy of over $600 billion between taxes owed and taxes collected by the agency. 

Changes in the process of implementation are likely to induce upset among crypto investors. That being said, politicians across the board have prioritized crypto regulation among concerns of market manipulation and uninformed retail investments.

For business owners who have thought that crypto is a way to avoid (or evade) tax liability, to move money undetected, or otherwise skirt regulations, the recent rise in interest by IRS and other government entities in regulating the industry should come as a warning.  There are two things that we all can’t avoid…. And one of them is taxes.