Employment Development Department (EDD) performs many services, but their primary role that impacts small businesses is collecting and auditing payroll taxes. Employers pay payroll taxes for W-2 employees, but not for 1099 independent contractors.

Independent contractors, also known as gig workers, work on a contractual basis for a specific job. This is becoming a highly desirable form of employment for individuals as well as for businesses looking to hire contractors to complete tasks outside of their typical scopes of work. 1099 independent contractors are self-employed, create their own hours, use their own equipment, are paid a set rate, and do not have payroll taxes deducted from their payment—which saves employers money.

Using independent contractors to assist with your day-to-day business functions is becoming increasingly popular. Before you look to hire contractors, it is important to understand what should be included in the contractual agreement. This helps keep your business safe from legal trouble in the future.

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

Hire an independent contractor and comply with California law to avoid triggering an Employment Development Department (EDD) audit. Following the steps below does not guarantee that your contractor will still remain a contractor if you are audited by EDD. However, there are ways you can strengthen your position and not have your contractors reclassified as employees.

The California Employment Development Department (EDD) uses the new Assembly Bill 5’s ABC test to identify worker classification. However, the older Borello Test can also be used in less clear classification circumstances. When it comes to correctly classifying your workers, how do you know which test to use and when?

The Employment Development Department (EDD) sends audit letters through the mail. If you receive an audit letter, you have 30 days to reply. Typically, the agency audits back three years from the most recent tax filing. However, EDD sometimes will audit the previous year’s tax filings.

In California, the Employment Development Department (EDD) conducts audits of payroll taxes across the state. During the audit process, the assigned agent looks at classification of W2 employees and 1099 workers, and whether the correct payroll taxes were collected on payments made to all workers. Business owners should ensure their business is prepared for an EDD tax audit and that they have adhered to the new ABCs of worker classification set out in AB-5.

Read our frequently asked questions to get a better understanding of the difference between 1099 independent contractors and W-2 workers.

Gig workers, otherwise known as independent contractors, complete jobs on a contractual basis. They have the autonomy to choose when and where they work, have control over work instructions, evaluate their own work, and are well versed in the job they’re hired to complete. Their behavioral control is unlike employees who are told when and where to work, how to work, and who may require job training.

In 2020, the rules for filing and submitting 1099-NEC and 1099-MISC tax forms changed. Moving forward, 1099-MISC forms are no longer used to submit nonemployee compensation. This separates nonemployee payments from miscellaneous payments and eliminates the confusion around form due dates. Filing either 1099-NEC or 1099-MISC requires the completion of a Form 1096 as well. This is an Annual Summary and Transmittal of U.S. Information Returns that summarizes all of your 1099 files for the year. IRS uses this form to summarize the tax forms businesses send to hired workers.

Prop 22 is an initiative for rideshare drivers, like Uber, Lyft, and Doordash, to be classified as independent contractors instead of employees. It advocates that these workers would then be independent contractors who have the labor and wage policies specific to the companies they work for instead of employee benefits of overtime, paid sick leave, and health care.

If you’re a business based in California, you’ve likely had dealings with the Employment Development Department (EDD). It is the responsibility of EDD to collect payroll taxes and conduct payroll tax audits of companies and businesses. In addition, EDD performs what’s called Unemployment Insurance (UI) benefit audits. The federal-state unemployment insurance system (UI) helps people who have lost their jobs by giving them temporary wage replacement. The purpose of the government benefit audits is to protect the integrity of the UI program.

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.