Independent Contractor Federal and State Tax Issues: CA AB5, Dynamex, IRS 20-Factor Tests, Safe Harbors and Audits

Description

At least 28 states have adopted some form, or portions, of the so-called ABC test--a three-pronged test for determining whether a worker is an independent contractor. The most notable, and perhaps burdensome, is California's Assembly Bill 5 (AB5), commonly referred to as the "gig worker bill," which includes per-check penalties of up to $25,000 for missclassified workers.

More disturbing than AB5 is the 2018 decision by the state's supreme court in Dynamex Op'ns West Inc. v. Superior Ct. The ruling requires companies to use the three-prong test, assumes all workers are employees unless the company can prove otherwise, and is effective retroactively.

Unlike most states, the IRS uses a 20-factor test, outlined in Revenue Ruling 87-41, to determine whether a worker is an independent contractor. The factors do not offer a bright-line test. Instead, employers must weigh all the factors and decide how to classify workers. The IRS Publication 1976, Do You Qualify for Relief Under Section 530? outlines three requirements a business can meet to qualify for safe-harbor relief from these subjective guidelines and payroll tax exposure.

In keeping with the gig economy's growth, in January 2020, the IRS launched the Gig Economy Tax Center. Simultaneously, the IRS and states continue to question and audit worker classifications. Businesses and their advisers need to understand the latest developments in worker classifications made by states and the federal government to pay workers properly and avoid substantial penalties.

Listen as our panel of veterans explains best practices for businesses struggling with worker classification and the safe harbors available to stand up to challenges and avoid payroll tax and penalty exposure.