The California Employment Development Department (EDD) is a government agency that provides unemployment benefits, collects and audits payroll taxes, and maintains California employee records. With the new AB-5 regulations, there are stricter worker classification rules. Now, workers are only classified as independent contractors if they meet all three criteria of the ABC test:
- “The person 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.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
The department audits businesses’ payroll records to ensure that all workers are properly classified. Misclassification can lead to heavy fines and penalties as seen in the recent federal court ruling of Holland Acquisition Inc. This Pennsylvania-based company underwent an audit and was found to have improperly classified workers from 2012 to 2019. This caused a backlog of wages and taxes owed to at least 700 of their workers. The audit findings uncovered over $40 million in fines owed to their misclassified workers.
The U.S. Department of Labor released a statement regarding the case, “We hope that other employers in this industry use the outcome of this investigation and court action as an opportunity to review their own pay practices to ensure they comply with the law. Failure to do so, as we saw in this case, comes at a significant cost,” said Regional Solicitor Oscar L. Hampton III in Philadelphia, “The Department of Labor is committed to enforcing the law and protecting workers no matter how long it takes.”
In light of the outcome of the findings in the Holland Services audit case, how can a got1099 report help business owners before facing an EDD audit?
What is a got1099 report?
Our got1099 report supports business owners and employers in properly distinguishing between 1099 independent contractors and W-2 employees. For businesses hiring independent contractors, this report verifies that your hired independent contractor isn’t accidentally performing the duties that fall under W-2 employees.
For business owners with 1099 workers performing similar tasks to W-2 employees, or business owners uncertain if their 1099 workers have current business entity filings, licensing, and other elements as outlined in AB-5, the got1099 report provides peace of mind. Our comprehensive reports and monthly alerts can help you feel secure that you will be prepared to defend your workers’ classification against a government audit or inquiry.
With recent changes under California law, there are stricter requirements making it more difficult to hire 1099 contractors without proper verification.
Independent contractors, in order to be correctly classified as such, must pass the ABC test and have the following:
- EIN number
- Business verification
- Business License
- Social media presence
Businesses who use a got1099 report are provided the unique security of knowing each of their workers is correctly classified in the face of an audit. Each worker’s got1099 report includes the criteria EDD auditors search for to classify workers as contractors or employees.
How does a got1099 Report Save Businesses Money?
If the report finds that your business has accidentally misclassified a worker, or that a worker is certain factors that EDD is likely to look for, you as a business owner can use the findings to fix errors before an audit ensues. Business owners can either reclassify any misclassified workers correctly or ask the worker to establish the missing elements so they can be properly classified and continue working as independent contractors.
Our report could have saved Holland Acquisition Inc. millions of dollars by alerting them they were misclassifying their employees as workers before accruing nearly a decade’s worth of fines and penalties.
Investing in a got1099 report can help save your business money long term. The report helps businesses avoid heavy fines and penalties, like in the case of Holland Acquisition Inc.’s $40 million owed to EDD. While EDD audits may only go back 12 quarters, if they uncover substantial misclassifications, they can opt into auditing additional historical tax filings of your business.
The penalties of an audit vary depending on the results, but fines can add up quickly:
- Misclassifying an employee as a W-2 instead of 1099 typically results in a $50 fine per misclassification
- Charge of 1.5% of employee wages to make up for income tax withholding
- Payment of 40% of employee payroll taxes
- Matching 100% of payroll taxes plus interest
- 0.5% penalty for the Failure to Pay Taxes penalty for each month of delinquency
More serious penalties result in heavier fines. If EDD finds intentional misclassification, fines can result in 20% of wages paid plus 100% of payroll taxes. Misclassification of a worker can rise up to $1000 per misclassification and even a year in prison.
Learn more about what businesses need to know about EDD audits in 2021 in our article here.
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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.