A business owner’s hiring of a worker as an employee has real costs beyond the wages paid to the employee. Such costs range from hard costs (e.g., payroll taxes, unemployment, health and disability insurance, etc.) to costs such as compliance with the regulatory requirements of having an employee, along with the added administrative burdens of payroll and a human resource department. In a perceived cost savings measure, some business owners have been tempted to hire workers and treat them as independent contractors. Nonetheless, the decision to designate a worker an “independent contractor” as opposed to an “employee” is not one without consequences that demand careful consideration for both federal and state purposes.
To assist business owners with decision, the California Employment Development Department (EDD) has recently issued its “Employment Determination Guide” to help business owners determine whether a worker is an employee or an independent contractor. There is not much that is new in this guide; the summary still states that if the worker is subject to the strict supervision of the business owner as to time, place and method, the worker is more likely an employee for whom wage withholding, unemployment compensation insurance, etc., are required. If the worker is responsible to the business owner only as to the completed result, without strict supervision as to when, where and how the work is performed, the worker is more likely an independent contractor. The degree of control is but one of three sets of factors that are evaluated to determine proper worker classification.
Guides such as the one issued by California genuinely serve to clear up ambiguity or confusion in a particular regulatory area. However, such guides may also indicate areas in which the state is intending to pay increased audit attention. Workers, themselves, are also more aware of the classification issue. It only takes one former “independent contractor” to file for unemployment or classification determination to wreak havoc on your business. Consequently, we believe that now is a good time to review the classification of your workers, not just in California, but in other states as well.
For further information, please contact your Aronson tax professional or Henry Chiwaya, Aronson State and Local Tax Services, at 301.222.8215.