Employee or 1099 Independent Contractor?

See the tools, links, video’s and phampets below and to the right to make the determination if you’re a 1099 independent contractor or a w-2 employee.  California AB 5 which put into law the decisions of the Dynamex Operations West Inc. v. Superior Court pretty much made everyone an employee w-2.

In general, w-2 employees would be on the Employers DE 9 and can enroll in the Group Health Plan.  In general, 1099 independent contractors can’t get on the group health plan.  They could enroll in an individual plan and may be able to write it off as a self employed biz owner, Schedule 1Schedule C.

Check out our webpages on how 1099 & Gig workers can apply for unemployment & PPP Loans

Dynamex Operations West Inc. v. Superior Court

Three-point criteria.

In a California Supreme Court ruling, the presumption is that everyone is an employee.  The hiring entity can be exempt from treating the person as an employee if they met this three-point test:

1) Is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

2) performs work that is outside the usual course of the hiring entity’s business; and

3) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Actual 85 page ruling

Now Codified under AB 5
Wikipedia * Text *

Group Health Insurance Rules

DE  9 Requirements to get Group Health Insurance

Employee definition §10753 under Health Care Reform

Federal Employer Mandate definition employee 

Misc.

ERISA Definition  29 USC 1002  (6) The term “employee” means any individual employed by an employer.

Social Security Definitions

Recent Tax Court Ruling May 2016

More on 1099 Lawfully Present in USA?

Verify work eligibility

My CPA’s Summary

Proposition  22 to negate AB 5

2.9.2020 

AB 5

The bill, which became law on January 1, 2020, codified and expanded a California Supreme Court ruling dictating that virtually anyone working for your company except specifically excluded professions is a W-2 employee. These employees include ever-escalating minimum wages, egregious unemployment and worker compensation costs. The California state government continues to intensify their micromanaging of California businesses.  Read more 

2017

1099’s are used by federal and state governments as third-party verification of income needed to be recognized by the recipient.  Clients ask all the time whether they need to recognize the income if they do not receive a 1099. The answer is Yes.  The government just uses the 1099’s to keep you honest There can be severe penalties for not filing required 1099’s.  Recently a client was audited by the state of California.  Though they did file 1099’s, they did not file all the ones required.  The state assessed them over $6,000 (10% of the amount that was to appear on the 1099’s).  The federal government also has a penalty.

So here is a primer on the requirements:

The IRS has begun focusing heavily on taxpayer compliance with information reporting laws. Generally any person, including a corporation, partnership, individual, estate, and trust, who makes reportable transactions during the calendar year, must file information returns to report those transactions to the IRS. Persons required to file information returns to the IRS must also furnish statements to the recipients of the income. To properly report the information required on Form 1099, you need to have the provider’s taxpayer identification number (TIN). We suggest you request that the provider fill out and give you a Form W-9, (Request for Taxpayer Identification Number and Certification), before work is done or payments are made. If a provider does not supply you with a taxpayer identification number, you are generally required to “backup withhold” 28 percent from any “reportable payments.” You must file Form 1099-MISC, Miscellaneous Income, for each person to whom you paid during the year: At least $600 in rents, services (including parts and materials), and other income payments. You must report payments on Form 1099-MISC only when the payments are made in the course of your trade or business. Personal payments are not reportable.  Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient.

Payments for which you are not required to file a Form 1099-MISC include:

(1) generally payments to a corporation; (Payments for Attorney Fees must be reported on form 1099 whether or not the attorney is incorporated)

(2) payments for merchandise, telegrams, telephone, freight, storage, and similar items;

(3) wages paid to employees (these must be reported on Form W-2, Wage and Tax Statement);

If you fail to provide Form 1099 and cannot show reasonable cause for the failure, you may be subject to a penalty. The penalty applies if you fail to provide the statement by the deadline, fail to include all information required to be shown on the statement, or include incorrect information on the statement. The penalty is up to $260 per individual 1099 not filed on a timely basis. You may also lose the deduction for the payment if you do not file a timely 1099. If you have any questions about how this affects you or your business, please contact me.  Though I do not prepare 1099’s, I can get you someone to do such if you have not already done so.  They are now due on January 31st to the government.

Love and Kisses, Your Devoted CPA Bruce L. Bialosky, 9301 Wilshire Blvd., Suite 605, Beverly Hills, CA 90210 bruce  —-  bialosky.biz  BIALOSKY NEWSLETTER January 17, 2017

California Resources

How to report 1099 Income for Covered CA MAGI calculations & subsidies  

CA EDD DE #38  13 Questions for Determination Revised January 2016 – out of date?

EDD Guide DE 44 see Page 8

Worker’s Compensation Rules – CA Department of Industrial Relations Common Misconceptions

 EDD Pamphlet  DE 573 m Pre Dynamex Case out of date?

Labor Code 3353

IRS Website  —   Independent Contractor – Self Employed – Employee  

SS8 Form – Determine Worker’s Status for Federal Employement taxes & Income tax withholding

Publication 15 A Employer’s supplemental Tax Guide

IRS SS-8 Worksheet to determine status

Instructions to Complete the 1099 form

My CPA’s warnings about what happens if you don’t file the 1099 properly

Willful misclassification SB 459 1/1/2012 Commentary by our CPA

Nolo Contract With Independent Contractor How to Safely & Legally Hire Independent Contractors  

IRS 20 factors 

Enter your census and get instant proposals for California – then email us [email protected] if you need additional information or to enroll
Enter your census and we will get right back to you with quotes

How to fill out Schedule C for Business Taxes

Schedule C - Profit or Loss from Small Business

irs.schedule.c

IRS Publication 15 – A 

Employer’s Supplemental Tax Guide 

Don’t forget – AB 5 & Dynamex control in CA!

  1. Who Are Employees?
  2. Employee or Independent Contractor?
  3. Employees of Exempt Organizations
  4. Religious Exemptions and Special Rules for Ministers
  5. Wages and Other Compensation
  6. Sick Pay Reporting
  7. Special Rules for Paying Taxes
  8. Etc…

CPA Income Tax Tips – W 2 or 1099?

Historical Pre Dynamex Case

 

Report of Wages (DE 9): & Employee Listing  (DE 9C):

​EDD California Employers Guide DE 44 

Employement Development Department CA employers Guide DE 44

Forms & Publications EDD

13 comments on “1099 vs Employee & Other Defintions

  1. Los Angeles Times article about it Uber driver that died from complications of a disease they say he contracted while driving

    Sure he doesn’t get Worker’s Compensation benefits as an independent contractor

    But I wonder about Social Security survivor benefits if he was filing taxes and paying into that

    Also he can buy life insurance on his own along with disability insurance on his own

    So when you do a job as an independent contractor you’re basically a self-employed businessman and you’re responsible for doing everything on your own because you’re a businessman

    Here’s the link to the LA Times

    This Uber driver died of COVID-19. Proposition 22 will sway his family’s fate

    https://www.latimes.com/business/technology/story/2020-11-01/prop-22-uber-driver-covid-19-death-benefits-workers-comp

  2. Yes, They Are W-2 Employees

    Dear steve:

    The world of running a business in California has changed radically. The days of any discretion in treating someone as an independent contractor are gone. To quote an employment law attorney “unless they are your plumber, if you pay someone for services, they are your W-2 employee”. The State of California has taken an absolutist draconian approach to this. As is usual with the State of California fines and penalties for disregarding these provisions will be disproportionately painful.

    In 2018 the California Supreme Court made a ruling that completely changed how to determine whether someone is an independent contractor. The ruling established a three-point test to determine if someone qualifies as an independent contractor. The person must pass ALL three tests:

    1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both factually and under contract for the work.
    2. The worker performs work that is outside the usual course of the hiring entity’s business.
    3. 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.

    The last test is very important. For example: if you are in the business of computer programming and someone works for you who is a programmer remotely and has never set foot in your office, they are still an employee. Where the work is performed, and the number of hours worked, unless very minor, are not relevant to the determination as to whether someone is an employee.

    Following up on this the California legislature passed and the governor signed AB5. This is a bill which made these rules part of the employment law code of California. Many other states have or will be following suit.

    The law tied together the various employment related rules, including worker’s compensation and unemployment insurance. This means that if someone who works for you is determined to be an employee, not an independent contractor, the business will be liable for those costs in addition to payroll and income taxes. Other states are adopting them because they bring in more revenue.

    AB5 does exempt certain professions from the new rules and throws them back to being tested by the old rules. Except for real estate salespeople and individuals who repossess property all exempt occupations must pass the old rules which are referred to as the Borello rules coming from a state court case. I will not go into all those points here because we have all lived with them for ages. There are eleven points and they don’t all need to be met. It is a preponderance of facts from the eleven points.

    If you are dealing with one of these exempt professions it is very likely that the tax agencies will be looking more closely at the Bordello tests to make sure that you are complying. It is not an exaggeration to state that if you are audited on this issue you are guilty until proven innocent in the eyes of the employment tax authorities.

    Insiders have stated the reason that the following exemptions exist is that they were necessary to get the bill passed. Rhyme, reason, or any other practical considerations were insignificant or non-existent. The exemptions are:

    1. Physicians, surgeons, dentists, podiatrists, psychologists, veterinarians
    2. Insurance brokers
    3. Lawyers
    4. Architects and engineers
    5. Licensed Certified Public Accountants
    6. Registered securities broker-dealers and investment advisers
    7. Direct sales salespeople (must not be paid by the hour and must have a written independent contractor agreement). Note: this covers companies like Avon.

    Workers in these categories must have all required professional or occupational licenses. For example, a Certified Public Accountant with an inactive license would not qualify.

    Then there is another group that may qualify for exemption from the draconian three-step rules. These professional services must meet six additional tests to be exempt:

    1. Maintain a business location separate from the hiring firm – this may include their personal residence.
    2. Have a business license, in addition to a professional license or permits.\
    3. Be able to set their own rate for the service performed.
    4. Be able to set their own hours.
    5. Be customarily engaged in the same type of work under contract with another hiring firm or hold themselves out to other potential customers to perform the services.
    6. Customarily and regularly exercise discretion and independent judgment performing their services.

    To protect yourself you will need to get a signed W-9 and a copy of their business license BEFORE you pay them. It is advisable to check they are licensed for their profession on the government’s website for the service or certainly obtain their license number or a copy of the license. Obtaining a list of some of their other customers is advisable.

    Here is a list of professions falling into this category:

    1. Marketing professionals (providing the contracted work is original and creative)
    2. Travel agents
    3. Human Resource Administrators (provided the contracted work is predominantly intellectual and varied in character)
    4. Graphic Designers
    5. Fine Artists
    6. Enrolled Agents
    7. Payment processing agents through independent sales organizations
    8. Photographers or photojournalists who license their license their work no more than 35 times a yar to hiring firm.
    9. Freelance writers, editors or cartoonists who provide content no more than 35 times a year to a hiring form.
    10. Licensed barbers, manicurists, electrologists, cosmetologists and estheticians, if they meet a series of other tests not delineated here.

    Real estate agents and brokers and construction sub-contractors are exempt if they have active licensees.

    Do not look for logic or fairness in this. It is illogical, unfair, draconian and a huge burden on business. Considerations that are so unimportant in Sacramento as to be effectively nonexistent.

    Hiring an out-of-state independent contractor is not necessarily a solution. The recent Bindley decision of the California Office of Tax Appeals requires out-of-state sole proprietors to pay California tax on their income. Physical presence in California is no longer required for a service provider to be taxed in California. This decision may subject these contractors to California employment rules.

    If you have questions about these rules you really need to consult an employment law attorney.

    Just to put some unneeded icing on the cake it has been made that certified public accountants are not covered for liability in advising clients on issues relating to employment status.

    At the risk of shocking you, attorneys are exempt from the provisions relating to liability relating to advising regarding employment status.

    I caution you in the strongest terms, that ignoring these rules will result in needless significant liability and financial hardship. This is a cash cow that California fully intends to vigorously milk.

    This is for information only.

    https://en.wikipedia.org/wiki/Bruce_Bialosky

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