So, the California Supreme Court just handed down a pretty far reaching and extremely relevant decision that will affect most businesses who pay others for help during the year.
In the past these were the federal guidelines which were interpreted (at least by employers) fairly broadly: ( IRS Small Business Week Tax Tip 2017-02, May 1, 2017 )
- Control. The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a worker’s job, it exercises financial control.
2. Relationship. How the employer and worker perceive their relationship is also important for determining worker status.
Last month the California Supreme Court dropped a bombshell decision in Dyanmex Operations West, Inc v Superior Court that is likely to serve as precedent for other states as well as be used as the guiding precedent for future IRS decisions about worker classification. They determined that in addition to the two tests above, if the worker is “customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity” that worker is an employee not an independent contractor.
Why is this case important to the government? States believe many people should be entitled to the benefits of mandatory sick pay, overtime pay, unemployment benefits, etc. When they are not paid as employees there is a likelihood that costs will fall to the state. The Feds believe many are skirting their responsibility to fund the Social Security and Medicare funds adequately and have been looking into enforcing compliance in every way possible. Both the state and the feds also have a more efficient method of securing their tax enforcement from workers because its easier to garnish for child support, back taxes, student loans, etc.
Why is this important to you? Compliance post audit may be costly in covering the back employer tax responsibilities as well as making up for things that come up in labor disputes in the future. A couple of things to note
a) If your worker requires a license to do what he or she is doing but doesn’t have one and is relying on your license to work – that is an employee NOT an independent contractor.
b) If your business is selling insurance, running a trucking fleet, social media expert, plumbing, electrician, or other skilled trades…and you are paying people on 1099s to do those jobs, they will be considered employees. However, if your business is plumbing and you pay for a social media expert to market for you, assuming they are not under your control and direction, they would still be independent contractors.
The Court has stated that simply not prohibiting a worker from engaging in independent business is not enough. You need to establish your worker is truly engaged in business for themselves. This could mean licensing, incorporation, advertising, etc.
This one is really important guys – You need to be in contact with your accountant. Or contact us to discuss what to do. If you are an independent contractor and want to maintain that classification, we need to talk as well.
We’ll chat again soon!