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.
A 1099 form is a tax form specifically distributed to independent contractors. Correct distribution of 1099 forms keeps you in compliance with EDD’s strict classification guidelines. Independent contractor’s 1099 status differs from W-2 workers. Since the 2020 passage of AB-5, the Gig worker bill, the criteria for correct contractors and worker classification changed.
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.
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.
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.
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.
No one wants to find themselves under audit. Whether from IRS, EDD CFTB, or other government agencies, audits are stressful and time-consuming. When it comes to facing an audit, how you react at the start of the audit can make all the difference.
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.