The California Employee Development Department (EDD) is one of the largest state departments and is responsible for compliance with employment guidelines, maintaining employment records, and collecting payroll taxes.
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.
An independent contractor is someone who provides a service to another company. They have the privileges of working for themselves like creating their own terms and hours, but they still work with businesses to provide services based on a contractual agreement. Independent contractors are not on the company’s structured payroll.
If you are employing workers as a business, there’s a chance the Employment Development Department (EDD) may audit you. They conduct standard procedures to find any errors or discrepancies among the classification of W-2 and 1099 employees. There is a difference between the two, and the correct classification is imperative to ensure you and your business do not suffer penalties or fines during an audit.
Unintentional misclassifications may result in a $50 penalty for each W-2 form that was not filed for an employer classified as a contractor. The employer also faces penalties of: 1.5% of employee wages to compensate for income tax withholding, 40% of employee payroll taxes, 100% of matching employer payroll taxes plus interest on each of these penalties, and a Failure to Pay Taxes penalty of 0.5% of the unpaid tax liability for each month delinquent.
W-2 forms and 1099 forms are meant for different workers. You cannot issue the same employee a W-2 and a 1099 at the same time. It’s confusing differentiating the two in your own business, understanding the differences are key to making sure your business avoids triggering an EDD audit.
In early May of this year, the Biden Administration officially made the decision to revoke the previously adjusted Trump era ruling on independent contractor classification.
For employers who hire both W-2 and 1099 contractor workers, it is essential that the criteria for a worker to be classified as a contractor are met. To meet those requirements, one has to actually understand the requirements… a task that the labyrinthine language of government entities does not make simple.
CSLB Report of Stings/ Sweeps and Contractor Audits – On July 1st CSLB released the following article re: site sweeps. Are your workers correctly classified?
An audit occurs when EDD launches an investigation into a business’s payroll records to determine whether they have correctly classified their employees. What many don’t know is that EDD audits involve more than passive risk factors like classification.
got1099 is a business reporting company providing business analysis reports to companies re: their 1099 independent contractors We do not provide legal advice. Consult with your attorney relating to any legal issues.
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