Tag Archive for: Independent Contractor

California CPAs should ask their clients who hire 1099s if they have a contractual agreement, invoices, licenses, insurance, and an EIN.

Certified Public Accountants (CPAs) have the most insight into their business owner clients’ daily transactional history. You may find that your clients who have 1099 contractors are now in the grey area of worker classification since it was redefined by AB-5 in January 2020.  

Under the new bill, all workers are automatically classified as W-2 employees unless they meet all three of the following criteria

  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
  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.

We frequently see cases of inadvertent contractor misclassification that are flagged by The Employment Development Department (EDD). EDD audits are most commonly triggered by: 

  • Independent contractors filing for unemployment benefits 
  • Employee complaints 
  • Late tax filings 
  • Random verification audits 

If the agency finds any misclassified workers during the audit, it results in fines, fees, and penalties that can be damagingly high if left unaddressed. 

Keeping this in mind, here are questions you can ask your clients to ensure that their 1099s are correctly classified, and help your clients reduce the risk of an EDD Misclassification Audit: 

  • Do your 1099s do similar jobs to your W-2s?
  • Do you have a contractor agreement with all of your 1099s?
  • Do your contractors Invoice you?
  • Does your contractor have a license?
  • Do they have insurance? 
  • Do they have an EIN?

Here’s an overview of how each question can provide more insight for your clients. 

Do Your 1099s do Similar Jobs to Your W-2s?

1099 independent contractors who perform similar jobs as W-2 employees may be considered an employee during an audit unless there is a clear distinction between the two. Make sure there are clear distinctions between the two. The W-2 employee works regulated hours, has specific job functions, is provided work equipment, and is told when and how to perform their job duties. They also receive employee benefits and do not have a clear end date for the work performed. 

On the other hand, 1099 independent contractors have flexible working hours, flexible job requirements as dictated through the contract, must provide their own working equipment, can work for multiple employers at the same time, and are not directly managed on job functions. They do not receive employee benefits and have a clearer job end-date. 

For example, one of your business owner clients may have a marketing coordinator who is classified as an employee. Your client may want to hire a marketing agency for a website redesign as a 1099 independent contractor. While both the marketing coordinator and the marketing agency perform job functions under the marketing umbrella, their job functions and classifications are different. 

The coordinator develops and executes the client’s marketing strategy specifically for your client’s company for as long as they work in that specific role. The hired marketing agency will perform the website redesign for your client until the project is complete. Once finished, the partnership is completed. While the marketing agency is working on your client’s website redesign, they can simultaneously work for other companies. 

Do You Have a Contractor Agreement With all of Your 1099s?

The independent contractor agreement outlines specific details for the job the independent contractor will perform. It is the working arrangement between the client and the contractor that typically includes:

  • A description of the job or service provided by the contractor
  • Payment details (this can include information about retainers, deposits and billing) 
  • The length and term of the project or service 

Do Your Contractors Invoice You?

Invoices help keep records of payments, type of work performed, and hours worked. Having organized records of invoices between the contractor and the client helps EDD verify that the independent contractor is indeed an independent contractor. 

Clients who put 1099s on scheduled payroll put themselves at risk for a misclassification audit. W-2 workers should be placed on payroll, not 1099s. 

Does Your Contractor Have a License?

Some workers (such as healthcare professionals and construction workers) are required to provide proper licenses to work. Failing to hire workers with proper licensure can open your client’s business to hefty fines and penalties from EDD. 

If your client hires contractors who don’t have licenses do they have: 

  • A website?
  • A social media presence? 
  • A marketing budget?

These are all important factors to consider. 

Do They Have Insurance? 

Independent contractors provide their own insurance to cover liability, worker’s compensation, or other risks to help them protect their business. If your client is insuring their independent contractors, this is a sign they may actually be W-2 employees. 

Do They Have an EIN?

An EIN is an Employer Identification Number. This is a unique tax identification number for businesses in the United States to pay state and federal taxes. Asking independent contractors without an EIN to provide one is a simple way to further ensure they are 1099s.

All of these factors add up to a robust defense against a misclassification audit by EDD. By fixing any misclassification errors ahead of time, CPAs can save their business owner clients the hefty fines and penalties associated with EDD audit findings. Want to learn more about the EDD audit process? 

Read our article on what to expect in an EDD audit here. 

 

California CPA's should ask their clients the right questions to help them avoid triggering an EDD audit

Small business owner responds to EDD audit

Now that the April filing deadline has passed, small business owners may be asking: what’s next?

As tempting as it may be to put off thinking of taxes until next year, some small business owners may be required to respond to an California’s Employment Development Department (EDD) audit.

Read on how to learn common EDD audit triggers and and how to respond.

What is a CA EDD Audit?

EDD conducts an audit to determine if the employer has paid the full and correct amount of taxes due under California law.

What Triggers EDD Audits?

The following circumstances most commonly trigger EDD audits:

  • An independent contractor filing for unemployment
  • The EDD verification process
  • Late filing of tax returns or late payment of taxes
  • Failing to pay wages on time or collect SDI and PIT

Many verification EDD audits are conducted on a random basis. These audits are not based on any assumptions of inaccurate or incomplete information. Additionally, EDD has the power to audit a company if they believe the business has purposefully misclassified workers in an attempt to avoid paying payroll taxes.

However, many legitimate businesses are unintentionally misclassifying employees. Many of these misclassifications are a as a result of new, strict worker classification regulations, related to Assembly Bill 5 (AB-5).

What is AB-5?

AB-5 is a piece of legislation that extends employee classification status to some independent contractors and gig workers depending on the qualifications outlined in the ABC test. AB-5 went into effect on January 1st, 2020, and changed how Small Business Owners (SBOs) who hire independent contractors operate in California.

Learn more about how this law came into effect, and how Dyanmex ruined it for everyone, here. 

How Can AB-5 Lead to the Misclassification of Employees?

AB-5 introduced the ABC test as a stricter guideline to determine how to classify workers as 1099 independent contractors. A worker must meet all three criteria of the ABC test to be classified as a 1099 independent contractor instead of a W-2 employee. The worker must:

  1. Be free from the control and direction of the hiring entity in connection to the performance of the work.
  2. Perform work that is outside the usual course of the hiring entity’s business.
  3. Be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the contractor misses one of the criteria in the ABC test, they should be classified as a W-2 employee.

Learn more about AB-5 and the ABC test, here.

What Happens If I Misclassify an Employee?

Employee misclassification can lead to several unfortunate outcomes, including fines and penalties.

With the new regulations, employee misclassification is more common for small businesses. As an example, let’s examine the case study of one of our clients, Ryan Brown, who misclassified his workers and was faced with EDD audit.

Check out the video below!

Meet the Client: Ryan Brown

Ryan Brown owns a construction company in Oceanside, California. His business classified a portion of the staff as 1099 independent contractors and the rest as W-2 employees.

How Can the Misclassification of W-2 Employees Happen?

The services of the hired independent contractor must be consistent with all three of the criteria established by the ABC test or they are automatically classified as a W-2 employee.

In Brown’s case, he didn’t realize that the independent contractors were providing the same services as the W-2 employees. Therefore, the employees he classified as independent contractors didn’t meet the second requirement, “[workers] perform work that is outside of the usual course of the hiring entity’s business.” Thus, all staff members should be classified as W-2 employees–any worker the business claimed was an independent contractor was misclassified.

What Triggered Brown’s EDD Audit?

EDD conducted a random site sweep of Brown’s business. This sweep resulted in EDD finding misclassified workers.

What Happened When Brown Contacted Milikowsky Tax Law?

Brown called Milikowsky Tax Law and set an initial meeting. Before signing any kind of retainer, John started making calls to learn more about the audit and what steps they needed to take immediately to protect the business and provide accurate information to EDD and CSLB.

What Were the Results of Brown’s EDD Audit?

After less than a month, EDD sent a final letter indicating the decision– minor fines were due, the case was closed. For Brown, the results–and knowing his business was going to be fine– provided a sense of relief.

Ryan’s results are both exceptional and the kind of outcome our team strives for with every client. And while we can’t promise any client’s outcome will be the same as another, we can say with utmost assurance that the team at Milikowsky Tax Law is your relentless advocate in the face of EDD, CSLB, and IRS audit.

What should you pay for a tax attorney?

 

How much should you pay for a tax attorney? It depends on the issue you’re facing. If you’re a business owner, you can expect to pay a little bit more because these cases tend to have more complicated issues. Sometimes, cases can cost $2,000 to $3,000, but it depends on the complexity of the case itself. 

A sole proprietor receiving a letter from the IRS two years after filing a return may be able to work with their CPA, instead of a tax attorney. However, it depends on the amount of tax liability. If the potential tax liability is not more than $40,000, it makes more sense to try to resolve it with your CPA first. 

Now, there can be a lot of tax legal issues that come along with an IRS audit, but if it’s simple enough, your CPA should be able to resolve it. At Milikowsky Tax Law, we do work with a lot of CPAs for these types of cases. Many times, the CPA may do the majority of the work, and we provide the legal support, depending upon the technicality of the issue. 

Case Study 

Recently, we worked with a client— let’s call her Sandy— who worked as a W-2 employee in a hospital and also claimed to own a business. On that business, the client reported $100,000 of gross income and about $250,000 of expenses. Resulting in claiming a loss of $150,000. 

After filing these taxes, the IRS sent the client a letter explaining they didn’t believe the return and requested an interview. Sandy brought the letter to our office before she became a client asking for our help. 

During our conversation, I asked her what exactly she did for work because the claim reported her business as telephony, and that she is a W-2 employee at a health organization. Neither form of employment is related to each other. 

Sandy explained she invested some money in a foreign country with a man who she didn’t know too well. He would tell her that she made $100,000 in a year but would ask her to wire money to him for expenses. He explained, “we spent $250,000 so you owe me $150,000”

When IRS reviewed her filings, the agency wondered how the client was losing money every year working in telephony. Upon speaking with the IRS agent, our firm’s biggest concern became the 15-year history of tax filings reporting a loss of money.  The client essentially zeroed out her taxes through her paychecks.

What appeared to be a very simple issue in the beginning, with not a lot of value, became a bigger concern as we uncovered its complexities with the IRS agent assigned to her case, who we’ve worked with numerous times on these types of cases. 

Should I Hire an Attorney?

When looking to hire a tax attorney, it’s beneficial to call the attorney to receive initial ideas and suggestions. Any attorney who is worth their weight in gold can talk through the issues quickly, and maybe even look through your return. 

Our office can assess a case in about five minutes and let potential clients know if their case is one that needs the support of an attorney, or if their CPA can handle the case instead. 

Important factors to consider for potential clients before hiring an attorney are:

  • Do you understand what documents the IRS are looking for?
  • What are the claims? 
  • What are the issues? 
  • What years are IRS auditing? 

More simple cases include a person facing an audit who failed to report income from a distribution. In these cases, the person facing the audit will most likely pay the additional taxes required. An attorney may be able to help waive the penalty if it’s high enough, but that would be found upon an initial assessment with the attorney. 

Keep in mind the fees you, as a potential client, are willing to pay an attorney in addition to audit finding fees or penalties owed. The goal of hiring an attorney is to hopefully pay much less, a fraction of what you could potentially owe, and get a result. Remember that attorneys are not able to guarantee results, however, anybody with significant experience will be able to tell you the likelihood of success. 

Questions about IRS? 

IRS performs audits randomly and also when flagged through tax filings. They require important documentation, organization, and meetings with the IRS auditor. 

Read our article that answers the most common IRS audit questions here

 

What should you consider before hiring an attorney

Independent Contractor

New classification guidelines between W-2 employees and 1099 independent contractors place stricter rules for businesses looking to hire. Common misconceptions about independent contractors can lead to businesses misclassifying workers and paying high penalties and fines. Avoid these consequences by understanding the regulations your business must follow when hiring independent contractors.

Let’s discuss the common misconceptions small businesses have about independent contractors. 

What is an Independent Contractor? 

A 1099 independent contractor is a worker who provides skills and services outside of the hiring entity’s usual course of business. They maintain control of their own work and performance, such as: 

  • Deciding when and where they work
  • Setting their own rates
  • Supporting multiple clients
  • Providing their own tools 
  • And more

How Do You Classify an Independent Contractor?

Worker classification regulations are now stricter due to Assembly Bill 5 (AB-5). This new law took effect in January of 2020 and changed how Small Business Owners (SBOs) who hire Independent Contractors operate in California.  

AB-5 introduced the ABC test as a stricter guideline to determine how to classify a worker as a 1099 independent contractor. The worker must meet all three criteria of the ABC test in order to be classified as a 1099 independent contractor instead of a W-2 employee.

  1. The worker is free from the control and direction of the hiring entity in connection to the performance of the work.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  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.

If the contractor misses even one of the criteria in the ABC test, he or she is automatically classified as a W-2 employee. 

Learn more about how this law came into effect, and how Dyanmex ruined it for everyone, here. 

What is the Difference Between a W-2 Employee and a 1099 Independent Contractor?

1099 Independent Contractors

1099 workers have their own independent businesses which the hiring entity maintains little control over – especially regarding daily operations. The hiring entity will not be responsible for withholding taxes from the independent contractor’s paycheck or for providing benefits (i.e. paid time off, medical benefits, and more) to the worker. 

Instead, the worker will usually be paid hourly on a project-to-project basis. The 1099 independent contractor will also often bring their own equipment and supplies to carry out the service. 

W-2 Employees

W-2 employees will be paid on a regular basis, often have a salary instead of hourly income, and may be given certain benefits such as healthcare and vacation pay. The hiring entity is responsible for filling out and filing with state and federal agencies, such as unemployment insurance, worker’s compensation, Medicare and Social Security forms. 

Additionally, the hiring entity is responsible for taking Social Security tax, Medicare and state and federal taxes from the employee’s paycheck as well as supplying any equipment necessary for the employee to perform the service. 

What Are Common Misconceptions About Independent Contractors?

With the addition of stricter guidelines surrounding the classification of W-2 employees and 1099 independent contractors, misconceptions about independent contractors are increasingly prevalent and can often lead to costly mistakes, such as misclassifying a worker. 

1. Hiring Workers as Independent Contractors is Less Expensive than Hiring Them as Employees.

While small businesses may save money on payroll taxes and benefits, hiring an independent contractor on a long-term basis may carry the opposite financial effect.

For example, the lack of control over daily operations and the inability to train workers can hinder the efficiency of the service being performed. These hindrances can lead to the service taking longer, increasing the number of billed hours at which the workers are often paid a higher hourly rate, and result in a higher final cost than if a W-2 employee had provided the service.

2. If the Worker Performs Similar Work for Other Businesses, They Are an Independent Contractor. 

The service performed by the worker is not a determining factor in their classification as a W-2 employee or 1099 independent contractor. 

Instead, the working relationship your company has with this worker, in relation to AB-5 law and the ABC test, will determine their status as an independent contractor. 

3. You Can Hire a Worker as an Independent Contractor on a Trial Basis Before Hiring Them as a W-2 Employee. 

The tradition of hiring a 1099 worker, observing their performance, and switching them over to a W-2 employee after a set trial period is common practice amongst businesses wishing to try out new hires or services. This practice, however, often pushes against the regulations set out by the AB-5 law. 

The working relationship between the new employee and the company during the trial period must be examined in determining their status as an independent contractor.

4. Your Company Can Sign a Written Contract to Make the Worker an Independent Contractor.

A written contract does not necessarily depict an accurate representation of the working relationship between worker and employer. 

The working arrangement must be consistent with the regulations of AB-5 law and the ABC Test for the worker to be classified as an independent contractor, regardless if there is or is not a written contract in place. Further, a contract is not enough to protect the employer from liability for misclassification if the working relationship does not meet the legal requirements for independent contractor status. 

5. Your Worker has a License so They Must be an Independent Contractor. 

Similar to having a contract in place, any licenses the worker has are not enough to determine their classification as an independent contractor. Their status will be determined by a number of factors outlined by AB-5 law and the ABC test.

How Do I Avoid Misclassification?

You can avoid misclassification by carefully analyzing the arrangement you have with your worker in relation to the guidelines described in the ABC test and regulations set forth by AB-5 law.

To learn more, read on about how to hire an independent contractor. 

Make sure you provide the list of employees, by wage category, including their wages and their job description with the corresponding code description.

We partnered with benchmark commercial insurance to discuss how audits relate to workers’ compensation. Benchmark offers a boutique approach to serving their clients through providing and maintaining commercial and personal insurance policies. Their goal is to establish comprehensive risk management and accident-avoidance programs to help prevent claims from arising. Get to know benchmark here

Watch our full video on how audits and workers’ compensation relate to one other in our video below.

 

 

How do Audits Relate to Workers’ Compensation?

Under a workers’ compensation policy, a policyholder is required to verify with the workers’ compensation carrier the actual wages that were paid to W-2 employees. In cases of hiring 1099 independent contractors, if they do not have workers’ compensation, the policyholder must verify the policy term. 

Most often, the audits triggered by workers’ compensation issues are referred to as wage verification protocol. The most important thing to remember about wage verification protocol when it comes to a workers’ compensation carrier, is making sure that you are providing the list of employees, by wage category, including their wages and their job description. In the provided list, make sure that each job description matches the code description in which you have them classified. 

During the process, your attorney should be reviewing the schedule with you before submitting the verification to the agent (auditor). Reviewing the schedule helps avoid having to reclassify wages in a higher-rated code post wage verification protocol. 

 

What is the wage verification protocol?

When the Employment Development Department (EDD) notifies business owners of the verification protocol, they send a letter in the mail. When business owners partner with our Milikowsky Tax Law team, we research the hired independent contractors that meet the criteria to be correctly classified as 1099 workers. In this process, we find:

  • Business reports 
  • Background reports 
  • Verify EAM and DBA
  • Business license 
  • EIN number
  • Social media accounts 
  • Website, if they have one (sometimes freelancers use Fiverr or Yelp pages instead)

Sometimes, during the verification process, EDD will notify business owners that workers were misclassified as independent contractors and should actually be classified as full-time W-2 employees. All of the information we gather on each individual worker helps build a case with EDD that the hired 1099 independent contractor is properly classified as such. 

The writeup we create for each worker is included in our initial response to EDD. When the auditor receives it, they don’t have to pursue the same research we already completed. While they will still need to verify our findings, the auditor will not have to develop their own theory about classification because we’ve already given them the story and the answer. This process is easier for the auditor to see versus when they are given information without a story behind it. 

There are tips and tricks to help business owners avoid feeling blindsided through the audit process either by EDD, CSLB, or by their workers’ compensation carrier. We’re here to help before business owners ever get to that process. Learn more about What to Expect in an EDD Audit here.

 

We partnered with benchmark commercial insurance to discuss how audits relate to workers’ compensation.

Dynamex, AB-5 and Prop 22 explained

Who is Dynamex and what did they do?

Watch our video below:

 

Dynamex was a nationwide same-day delivery and courier service. They employed their California drivers as W-2 employees who received the benefits, payroll taxes, and perks of being a W-2 employee. However, in 2004, the company reclassified all of its California drivers into 1099 independent contractors to save employee costs. 

 

With reclassified 1099 independent contractors, Dynamex then avoided paying their portion of employee payroll taxes, medical benefit costs, or other employee benefits costs. It saved them money at the expense of their workforce.   

 

After their reclassification, an employee filed a lawsuit against Dynamex for misclassifying him as an independent contractor and stripping him of his employee benefits. This lawsuit turned into a supreme court ruling that ultimately led to a completely new and stricter reclassification system than what was set in place before. 

 

The California Division of Labor stated that the Dynamex case misclassifications alone cost the state $7 billion each year. 

How did AB-5 come to be? 

The Supreme Court ruling on the Dynamex Operations West, Inc. v. Superior Court on April 30, 2018 changed the regulations for employers to classify workers. Before the ruling, worker classification was based on the unclear 13 Factor Borello Test. As a result of the ruling, the court created the California Assembly Bill 5 (AB-5) that included the new and clearer ABC test for employers to correctly classify workers.

 

AB-5 was signed into law by California Governor, Gavin Newsom, in September of 2019 and went into effect January 1, 2020. This is not just another bill. The new AB-5 law directly affects the way Small Business Owners (SBOs) who hire Independent Contractors will operate in California. The law impacts ALL SBOs. 

 

This new law redefines the way you as a business owner must classify your workers. It will now push California business owners to employ workers as W-2 employees and pay for benefits and protections (unemployment, overtime, sick leave, and worker’s comp) that employees get under California Law. 

 

There are several exceptions for specific industries and job categories. For those industries, the worker classification guidelines under Borello remain the standard by which EDD will determine worker classification. 

 

As of January 2020, California Employment Development Department (EDD) places the burden of proof on business to show that workers are correctly classified as 1099 contractors and that they should not be reclassified as employees under the stricter criteria set out in the new law. 

 

The new AB-5 law raises standards for many California workers to determine worker classification.

What is the ABC Test? 

The ABC test is AB-5’s new guideline for how to properly classify workers. In order to classify a worker as a 1099 independent contractor instead of as a W-2 employee,  they must meet all three criteria

 

  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.

 

What is the Borello Test? 

The 13 Factor Borello Test was the first method to classify workers. While the ABC test is now the new regulation and standard for worker classification, the Borello Test is still used today. Employers hiring exempt employees can fall back on this test to classify workers. The test asks the following 13 questions. 

 

  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?

 

Who Benefits from AB-5?

Beneficiaries of the stricter classifications are:

 

  • Workers in the gig economy who want to be able to unionize
  • Those working full time without benefits and who will, under AB-5 have to be offered benefits, protections, and earnings guarantees.

 

An example of a beneficiary of the new law might be 1099 workers for a large cleaning company who work fewer than 40 hours but only for one company, and do not have the benefits or protections of being an employee. These workers would, under the new law, be classified as employees and would be offered benefits, unemployment insurance and protection under the labor laws from being fired without just cause among many other W-2 wage-earning employee benefits. 

Who is at a disadvantage with AB-5? 

Companies who will find that AB-5 puts them at the biggest disadvantage in this new classification system are small to mid-sized business owners who want a flexible workforce by employing workers to help when times are good and then scale back either seasonally or due to market conditions. 

 

These small business owners will have to pass a much stricter analysis in order to be able to hire 1099 workers as opposed to W-2 employees. The burden of proof lies with the employer to prove that a worker is correctly classified as a 1099 contractor. and EDD will request proof that 1099 contractors have a legitimate business starting in January 2020.

 

Another group that may find the new law puts them at a disadvantage is the independent contractor who prefers to remain a 1099 contractor. According to Forbes and Gallup, 36% of US workers are in the Gig Economy. 

 

Retired people choose to pick up work, just like many recent grads and stay-at-home parents. For most of these workers, they don’t mind a 1099 contractor status and they do not want to be managed as a W-2 wage earner. For those workers, these new AB-5 classification rules are not offering any tangible benefits, they are creating impediments. 

 

Surveys done by Intuit in 2016, found more than 90% of contract workers prefer the flexibility and personal control they have as independent contractors. They can accept or reject a job based on the amount offered, timing, or indeed any reason – these workers work only when they want. 

What does this mean for Uber, Lyft, and other Rideshare programs? 

Uber, Lyft, and HopSkipDrive drivers may have to choose one “employer” and thereby not be able to pick up as much work in a given period of time. The ramifications of this shift will certainly affect both companies and workers. 

 

In order to find a solution to converting rideshare workers into employees, and keep them as independent contractors, Prop 22 was created. This piece of legislation sought to sidestep AB-5 regulations so that rideshare workers can remain independent contractors instead of becoming W-2 employees. 

 

Thus, they remain eligible to work when and how they want, and for as many rideshare app companies as they wish. Learn more about what Prop 22 means for you in our article here. 

Dynamex turned their W-2 employees into 1099 independent contractors. This stripped wither workers of their benefits and caused the Supreme Court to create AB-5

 

What Every Business Owner Needs to Know:

Starting a business rarely begins with a strategic checklist of all of the resources necessary to run and scale successfully. Rather, many, if not most businesses start because the founder has a passion or skill that is exceptional and in-demand and they grow from there.  Because of this, many business owners find themselves at strategic points in their growth with gaps in resources that are easily avoidable with a comprehensive simple checklist of what every business owner needs to know. 

Take stock of the resources you currently have and compare them to this checklist to see if you have gaps, overlaps that can drain resources, or if you’ve overlooked an important area of expertise. After all, an ounce of prevention is worth a pound of cure.

Your Checklist

Bookkeeper

You’ll need someone to keep track of your expenses and invoices.  Whether that person is in-house and manages your accounts receivable/ accounts payable, or outsourced and sends monthly reports on your cash flow status, a bookkeeper is essential to any business’ operations. 

A great San Diego based resource for bookkeeping is BooXkeeping. This company, started by Max Emma provides bookkeeping services for small to medium-sized businesses. They are a virtual service that serves a variety of industries. 

Certified Public Accountant

Gone are the days of the once-a-year call to a CPA to file taxes.  With great power comes great tax complexity. A once a year conversation is not going to cut it.  You need a CPA who is invested in your holistic business financial health.  

Mid-sized CPA firms such as Encore Partners, and Eakes and Company provide financial insights and strategies beyond simple tax planning and preparation.  Finding a CPA who understands your industry and special situation is a great addition to your team and your financial wellness as a company. 

Payroll Provider

At a certain point, Quickbooks is too simple for your company’s payroll needs. Getting a great payroll provider sounds easy, but with the behemoths dominating the industry many business owners feel they’re just a number.  Payroll is crucial because, as much as you may work because of the love you have for the company, your employees work at least in large part because you pay them.  

Some San Diego resources for payroll include Coastal Payroll and PayrollHUB. Both provide payroll services and human capital management services to let you stay focused on running your business. 

Insurance Provider

Business insurance is complex, expensive, and consequential.  From cyber liability to the industry-specific coverage you may need if you transport goods or provide services across state lines or internationally, proper insurance coverage is essential. 

Finding an insurance company that specializes in commercial coverage and will reach out to you more often during renewal time is not that easy.  From health insurance to EPLI coverage, insurance is a large part of the benefits you’ll offer to employees, and the protection you need for your business. 

Consider a small to mid-sized firm, some we know of here in San Diego are:

  • Benchmark Commercial Insurance offers commercial and personal line insurance for business owners and individuals with complex structures. 
  • Morrison Insurance creates various insurance programs for small to midsize businesses to help you find the greatest value for your dollar. 
  • Competitive Edge specializes in high-risk and construction insurance. The founder, Brenda Jo, is passionate about believing that you are more than the history of your insurance claims 
  • SBMA Benefits provides affordable ACA compliant Minimum Essential Coverage for Applicable Large Employers.

Human Resources

Human resources… Aren’t all resources human resources?  When it comes to compliance, having Human Resources services in-house or fractionally can make the difference between a bad hire becoming a lasting issue and being a blip on your company radar.  

The right HR provider can partner with your company to create manuals, handbooks, and pieces of training to keep you compliant. They also assist in creating operational structures to support healthy company culture and more. 

San Diego HR resources we know are: 

  • Culture Works operationalizes your workforce’s culture by implementing systems, processes, leadership training, and a foster of culture alignment to aid in a smooth operations process. 
  • Possibilities Consulting has outsourced HR services through Ari Saul and additionally, they help develop inspirational leadership, intentional culture, and high-performance teams in the workplace. 

Attorney

You don’t need an attorney until you need an attorney.  From employment law attorneys to civil litigation, finding the right lawyer when you need one will speed the time to resolution and protect you from unnecessary losses.  

Civil litigation attorneys Gupta Evans and Ayres and Employment law attorneys Tencer Sherman are reliable resources in the San Diego area. 

Protecting your intellectual property not only protects your ideas but can ensure that disgruntled ex-employees don’t take your business plan and implement it in a state with no non-compete clauses. Gary Eastman of Eastman IP is a resource here in San Diego.

At Milikowsky Tax Law, we’ve been entrepreneurs ourselves. We know first-hand about the challenges and the excitement of growing a business.  Regardless of your industry, there are structural elements that will help your company grow and manage the fluctuations of staffing, client success, and scaling more easily. 

Think we forgot something? Connect with us and share! 

Want to know when you might need a CPA vs a Tax Attorney? Read our article here

 

What Every Business Owner Needs to Know:

Vince B. EDD audit Case Story

We are grateful to our client, Vince B., for sharing his story of how we were able to help him weather an EDD audit. This audit could have closed his business and had far-reaching repercussions for his personal finances as well as business finances.

In 2020, Vince was hit with an EDD audit that threatened to not only shut down his business but impact his personal finances as well. Hear his story of how our expert team navigated his misclassification audit and brought down hundreds of thousands in fees down to about $6,000. His misclassification audit closed in 2021. 

Meet Vince in his testimonial below.

“My name is Vince Bindy and I’m a co-founder, co-owner of a behavioral health mental health facility in Orange County, California, and we’ve been operating efficiently for some years. And then we got hit with an EDD audit and to make a long story short, the EDD was trying to claim that all our therapists were actually employees. 

At the time it was quite shocking and we contacted some various attorneys and one attorney really just terrified myself and my business partner, Nick.

We came up with potential damages of theoretically several hundred thousand dollars. What could have been $300,000, $250,000, $400,000. We really didn’t know. And also, what we found out, much to our chagrin, is I guess a couple or three years ago, I don’t know for sure. 

The State of California passed a new law where if the corporation, for some reason, couldn’t pay all the back fees and penalties due to the EDD from an audit like this, they could come after us personally.

We called around, called around, interviewed three or four different attorneys. John Milikowsky’s law firm was one of the attorneys we interviewed. 

Fortunately, we picked John. 

All the attorneys sound good on the phone, right? When we first interviewed him, something about John felt right. He came across as very soothing and calm because we talked with a couple of other attorneys. And like I said, that one attorney really put the fear of God in us, times three. I mean, laying out all these potential scenarios. I guess that’s sometimes a sales technique to terrify somebody when you’re an attorney or other professions, and then getting them to sign up with you. 

John didn’t use that approach, more of a straightforward one.

We told him what this other attorney said. And he said, “Yeah, that could happen. But it’s very rare. I’ve never had that happen to me. It’s very remote.” So, I liked that soothing approach. He’s very experienced. He laid out all the cases he worked with in the past and dealt with firms similar to us in the medical field about our size. 

The third thing was just the way he was going to lay out the process. He just laid out the process. Here’s what we’re going to do first. Here’s what we’re going to do next. You’ll pay them a certain amount of money at this point and then kinda lay it out when the money will be due and kinda mapped out. 

A lot of the times you ask an attorney, roughly get me in the ballpark, what it’s going to cost and you never get an answer.

And John had no guarantees. You can never get a guarantee from an attorney obviously, but kinda he laid out a min-max of what it might cost, his legal fees. And I appreciated that as well. 

To make a long story short, that potential fear of having a debt of two, three, $400,000 got whittled down, negotiated by John’s legal firm down to, I believe, $6,000 in change. I could be off by a thousand bucks. It could have been five, could have been seven, I don’t remember. But when that happened, we were jumping for joy to tell you the truth. And so that’s why I’m doing this video. I’m extremely happy with the services.

And at the end of the day, results are all that matters in the way I view things and old John’s a great guy, but more importantly, he produced the results. And I got to tell you, that wasn’t even a goal. My goal with my partner, Nick, I said, “Nick, if John could get it below a hundred thousand dollars, I’d be happy at this point in time.” 

He got it down to 6,000 and change. So what more can I say?”

-Vince B. 

Vince’s audit was an EDD worker reclassification audit, something we are seeing more and more of in our practice in 2021. EDD is actively seeking 1099 contractor misclassification cases since the passage of AB-5 the Gig work bill in January 2020.  

The new ABCs of worker classification set stricter criteria for workers to be classified as contractors vs wage-earning W-2 employees.  In the case of this client, there was one worker who was misclassified and EDD sought to compel the company to reclassify ALL of their 1099s as W-2s.  

In cases like this, the advocacy of an experienced audit attorney can make the difference between a financially damaging penalty and a manageable penalty amount due.  While no one case can determine the outcome of any other, we do know that EDD’s audits are swift, decisive, and aggressive. 

Not sure what an EDD Benefit Audit is? Find out here

The Difference Between EDD and CSLB audits

Employment Development Department (EDD) and California Contractors State License Board (CSLB) audits both expose your business to fines and penalties if the agency finds you noncompliant with the strict regulations and policies they have in place for classifying 1099 independent contractors. 

Both CSLB and EDD perform site sweeps that can initiate an audit of your construction business.  CSLB is focused on (as their name suggests) licensing, whereas EDD is focused on payroll tax compliance.  The effect of an audit from either CA EDD or CSLB is the same: the stoppage of work and potential penalties and back taxes. 

EDD Audits 

EDD audits focus on payroll taxes. When an agency, EDD, CSLB, etc. audits a business, a common audit finding is the misclassification of employees. Employers can hire W-2 employees or independent contractors (1099). 

The difference between 1099 and W2 employees lies in the scope of work and which tax form each receives. Full-time and Part-time employees receive W-2 tax forms. They have a schedule set by the employer and report to their employer for daily tasks. These employees pay their employment taxes on their wages earned usually through the payroll provider who issues their checks. On the other hand, independent contractors receive 1099 forms, are not taxed on income, and have more work freedom as they are self-employed.  Contractors (1099 workers) set their own hours, submit proposals and have multiple “gigs” for different companies. 

The most common triggers of an EDD audit are:

  • An independent contractor filing for unemployment
  • Employee complaint of misclassification
  • Late or inconsistent filing of taxes 
  • Randomized verification audit 

EDD provides an in-depth checklist to guide employers on how to classify employees correctly. 

Worker misclassification 1099 vs W-2

An audit by EDD can lead to criminal exposure because incorrect classification means that  federal and state taxes were incorrectly filed and insurance was not provided when mandated by law. EDD identifying incorrectly classified independent contractors as W-2 employees or vice versa can open your business to fines, penalties, and potential jail time.

According to EDD, industries that run a higher risk of misclassifying workers include: 

  • Construction 
  • Hospitality 
  • Seasonal Industries
  • Technology
  • Healthcare

While you can hire unlicensed workers, they can only perform work under your license.  To work under your license requires they are classified as W-2 wage-earning employees. Correctly classifying employees from the beginning of the hiring process keeps your business compliant and ready for an EDD audit if one should occur. 

CSLB Audits 

CSLB is a government agency that regulates the construction industry and creates policies to maintain health, safety, and general welfare for the public. They provide licenses for independent contractors that stay in compliance with regulations and rules within the state of California. 

Contractors licensed in other states but working in California must apply for a CSLB license to remain compliant. Independent contractors hired and working in California must have a current and valid California license from CSLB to remain compliant with rules and regulations. 

Licenses are not required by the State of California only if the independent contractor is not advertised as a licensed contractor or if the job value including labor and material does not exceed $500. 

Audits performed by CSLB occur without any notification. Anyone can file a complaint or report unlicensed activity with CSLB to audit your business if they suspect suspicious activity of your worksite (including a competitor). Their statewide investigation teams conduct undercover sting operations for construction site sweeps. Agency will appear on the site itself and interview each worker to check for correct employee classification, licensing, and status.  

If you are caught hiring an independent contractor without a license, with an out-of-state license, or are incorrectly classified, you will be open to the fines and penalties of an audit.

The penalties of hiring an unlicensed contractor are hefty. If you are a business and you hire a non-licensed contractor, you may be putting yourself and your business at additional risk. These risks often include lawsuits in the event of injury, fines, and potential jail time.

This year alone, CSLB conducted site sweeps across California that cited 74 people for unlicensed contracting.  

To find out if your current or future independent contractors are licensed, use CSLB’s license check here. The site allows you to verify an independent contractor’s license status by entering a provided license number, or a Home Improvement Salesperson (HIS) registration number. 

How Do I Make Sure My Employees are Correctly Classified?

Is your company hiring independent contractors and subcontractors? Make sure each individual has a valid license during the entire time they are working for you. Sometimes, licenses can expire or be suspended during an active job. 

If EDD or CSLB audits your business and finds unlicensed independent contractors or independent contractors with an expired license, it will result in high fines and penalties. 

Learn more about how got1099 can correctly verify your employees, and send you alerts notifying you if employees’ licenses have expired by clicking the link in bio. 

Get the facts, order a got1099 report for your contractors to accurately assess the status of a worker you want to hire. The report includes verification of license along with notifications for license expiration so you don’t have to keep track of each individual’s license. 

Check this list of industries who are exempt from AB-5 to make sure your business is in compliance here

 

The Difference Between EDD and CSLB audits

Recent Construction Site Sweeps Explained

General contractors who hire unlicensed workers and unlicensed subcontractors put themselves at risk for potential criminal action by the local District Attorney (DA) and they risk receiving a stop work order from California Contractor State Licensing Board (CSLB) if and when that agency performs a site sweep.

 

A site sweep occurs when and one of several government agencies, including CSLB, Employment Development Department (EDD), and the California Labor Commissioner, target a specific local area in which construction is being performed and physically show up on the active site to conduct a site inspection. 

 

During a site inspection, workers are interviewed and EDD or CSLB verify whether they are properly licensed. 

 

These site inspections are random and can occur at any time, there is no forewarning.

 

Even a legitimate subcontractor who is licensed can run into issues if their license becomes suspended. As a general contractor, best practice is to regularly check to confirm all of your workers’ licenses are current. We recommend verifying your workers’ licenses monthly, if not more often.

 

CSLB typically refers their cases to EDD to audit the company and identify whether the 1099 independent contractors should be converted to employees. If you are found to have misclassified your workers as 1099s as opposed to wage-earning W-2s, your company is obligated to pay back payroll taxes and will be charged back penalties.

 

Employee misclassification is a serious issue because certain audit cases can be referred to the local DA for prosecution for insurance (worker’s compensation) fraud. Ensure your independent contractors are classified correctly and updated on their correct licensing requirements to avoid the penalties and fines from a random site sweep. 

 

According to the California Contractors State Licensing Board (CSLB), this year alone, 74 people were cited for unlicensed contracting. CSLB’s article highlights the risk for general contractors who hire unlicensed contractors. This number only considers those cited under a CSLB site sweep, not those caught up in an EDD site sweep.

 

Article below was originally posted on CSLB’s website – to see the original article click here: CSLB article:

Contractors Face 130 Legal Actions After Series of Statewide Stings and Sweeps.

 

Contractors State License Board enforcement operation part of national effort to warn consumers about dangers of hiring unlicensed or uninsured contractors. 

 

SACRAMENTO, Calif. – A series of statewide stings and sweeps conducted by the Contractors State License Board (CSLB) has revealed that unlicensed activity was not slowed by the pandemic. 

 

During the operation, 74 people were cited for unlicensed contracting. One of the many ways unlicensed contractors put homeowners at risk is because they do not carry workers’ compensation insurance, making consumers liable if someone is injured on the job. 

 

“Licensed contractors have proven experience, qualifications and verifiable business credentials to do the job right,” said David Fogt, CSLB Registrar. “This enforcement effort shows that even in an industry thriving after the pandemic there are still unlicensed contractors looking to take advantage of consumers,” Fogt said. 

 

From June 7 to 25, 2021, CSLB partnered with local law enforcement to conduct four undercover sting operations in El Cajon, San Diego County; Montclair, San Bernardino County; St. Helena, Napa County; and in Visalia, Tulare County. Undercover stings target unlicensed contractors, with investigators contacting the suspects through their advertisements. 

 

The suspected unlicensed operators came to the sting locations to place bids on projects including concrete, electrical, flooring, kitchen and bathroom remodeling, landscaping, painting, plumbing, roofing, and tree services. As a result, a total of 56 legal actions were filed and 49 people are accused of contracting without a license. Unlicensed contractors can face penalties of up to six months in jail and/or a fine of up to $15,000 if they bid or contract for work valued at more than $500. 

 

Twenty-four sweep operations of construction sites were also conducted in Fresno, Kern, Kings, Los Angeles, Merced, Monterey, San Benito, San Bernardino, San Diego, San Mateo, Santa Clara, Santa Cruz, and Ventura counties that resulted in 74 legal actions against licensed and unlicensed contractors. Twenty-five of the 74 legal actions were for unlicensed contracting and 30 Stop Orders were issued which halted all employee labor at active job sites where contractors did not have workers’ compensation insurance for their employees. 

 

The enforcement actions were part of a nationwide effort coordinated by the National Association of State Contractors Licensing Agencies designed to make consumers aware of the importance of hiring licensed contractors and the risks of using unlicensed operators. 

 

“Many homeowners are not aware of the financial risks when they hire unlicensed contractors,” Fogt said. “Saving a few dollars by hiring an unlicensed contractor can end up costing a consumer thousands of dollars when the work is not completed or in need of correction.” 

 

During the stings and sweeps, 13 individuals were also cited for requesting an excessive down payment. In California, a home improvement project down payment can’t exceed 10-percent of the contract total or $1,000, whichever is less. This misdemeanor charge carries a maximum penalty of six months in jail and/or a fine of up to $5,000. 

 

During operations, unlicensed individuals were given information on getting licensed and were invited to attend one of CSLB’s Licensed to Build workshops. CSLB also created a new B-2 licensing classification for home remodeling with the goal of promoting the growth of small businesses and increasing consumer protection. 

 

For their protection, CSLB recommends that consumers get at least three bids and check references before hiring someone for a construction job. Consumers can quickly check if a contractor is licensed on CSLB’s online Instant License Check. 

 

From the License Check, consumers can also view the contractor’s individual license page, which indicates if the contractor is carrying workers’ compensation insurance for employees. Contractors without workers’ compensation insurance should not have workers on the jobsite. Consumers can find a list of licensed contractors in their area by using CSLB’s Find My Licensed Contractor.