Employee vs Independent Contractor in California |
11:56am Apr 25, 2003 PST (#1 of 10)
I'm looking for a census on how other agencies classify employees in the state of California.
I assume many of you use "freelance" creative, epro and Print Production help. Do you 1099 them or put them on payroll? Has anyone ever been through an EDD audit?
Laurie Mason
11:56am Apr 25, 2003 PST (#2 of 10)
To piggy back on Laurie's comments. I think any agency's use of freelancers needs to be reviewed very closely because in some instances a good labor auditor can prove that a contract consultant is in fact an employee and cause your agency to incur back tax liability as well as penalties and interest and Erisa issues. Some things that can be used to determine is a consultant is an employee are things such as how you draft assignments and work hour requirements. I suggest everyone review the USDOL rules as well as the IRS rules just to make sure you don?t have an area of litigation.
Mike Thomas Fuse Inc
11:57am Apr 25, 2003 PST (#3 of 10)
We also have the freelancers fill out a W-9 at the start and send out 1099s at the end of the year. When the freelancer first starts with us they fill out the W-9, sign a confidentiality agreement and sign a receipt indicating they received a "Freelancers Manual", which contains copies of the previously mentioned items, our policies and procedures, software use, timesheets, invoicing, etc. We have not encountered any problems in the 4 years I've been here.
Liz Clapham
11:57am Apr 25, 2003 PST (#4 of 10)
Great info! Can you send a copy of your confidentiality, etc. form?
Jennifer Morrow Creative Company
11:57am Apr 25, 2003 PST (#5 of 10)
I have been through several audits and it is safer to put them on payroll for the short time. Have them sign that they are independent contractors and take out the taxes. Even if you dot all your I and cross all your T's you open yourself up to the IRS saying that they are employees. There are several rules to follow: Do you supply them with and office or equipment to use? Do you control their work hours? Are they at risk? Do you have others in your organization that do similar work?
If you answer yes to any of these, put them on payroll take out taxes you will save yourself time and money later on.
Steven D. Orenstein Chief Operating & Financial Officer Kern Direct Marketing, Inc.
11:58am Apr 25, 2003 PST (#6 of 10)
...to me too?
Rachel Hynd
11:58am Apr 25, 2003 PST (#7 of 10)
Ah, the joys of living in California!
Yes, there is a fine line between a 1009 freelancer and an employee in our state. Even though everyone may be in agreement that the freelancer is a contract employees, if they are being treated at all like a regular employee then the IRS will recognize them as such and they will fine the employer and charge them all of the back taxes. They look at things like if the freelancer is required to come to the employers office to complete the work or if they can complete the assignment elsewhere. The IRS also looks at if the freelancer is required to be in their office during specific hours or if they can complete the assignment during their choice of hours. Another one is timesheets, if they complete the employers timesheets vs. sending them an invoice, then well, the freelancer looks like and employee.
My rule of thumb is to make sure that we do not require any of the above and to make sure that they have other clients.
Anyway, that's my 2 cents.
Shannon Asquith Business Manager Tackett Barbaria Design Group
11:59am Apr 25, 2003 PST (#8 of 10)
As a Clients & Profits consultant for the past 9 years I would like to offer some input on this questions. I have also discussed this question with many client's and CPA's. There are a number of tests that an auditor will apply against a contractor. The most important one's are:
1. How much control do you have over the contractor? Are they expected to be at your office at the same times on certain days, or do they have flexibility in setting hours of work?
2. Does the contractor have other clients? Basically, have they established themselves as a business, or are they just in between jobs and have lined up a couple of part-time assignments?
3. Does the contractor pay quarterly estimated taxes?
Most of the time I see agencies get into trouble when they pay someone as a freelancer who is just out of work and is technically a part-time employee. The freelancer then finds full time work, but is laid off again soon after. When they reapply for unemployment benefits they list that they worked for your company, (as a freelancer). Of course the EDD has no record of them since you paid them as a contractor.
The prudent thing to do is to determine if the person you are contracting with has made a commitment to establishing themselves as a business. Do they have multiple clients, do they have a business card, a web site, a separate phone number for business, Etc. It's really just a quick conversation with the freelancer to see what their status is.
Nolo Press maintains free information regarding hiring contractors on their website www.nolo.com In addition to publishing a couple of useful books.
Robert Roll Integral Circuits (Clients & Profits Consultant) P: 415-775-9395
http://www.robertroll.com
11:59am Apr 25, 2003 PST (#9 of 10)
Laurie & Brent et al,
On the subject of are freelancers temp employees... while I am not a lawyer I know that a case against Microsoft (I believe the State of California vs. Microsoft) a few years ago clearly defines this matter. Likewise you may want to look at the following site: http://cobrands.business.findlaw.com/employment_employee/articles.html where you can look at the various laws by county pertaining to the contractor vs. employee issue. An article from the Orange County Business Journal downloads if you go to this site - http://www.swlaw.com/data/whatsnew/24.pdf
If you put someone on as a "freelancer" but have to temp employ that person, make sure you have a Deal Memo that outlines start stop dates. If not then you get into wrongful termination exposure etc. The film studios and production companies deal with this on a regular basis and I believe that all crew people are considered "temp employees" on shoots.
I have always gone by the rule of thumb that if you have people on staff at the company that perform the same job function as a "contractor" then you have to have them as a temp employee with all related benefits. The work around is if the person is incorporated or similar status - then a 1099 situation exists.
John Christian Freelance Producer / Project Manager
12:00pm Apr 25, 2003 PST (#10 of 10)
Laurie,
We're in CA. In addition to the usual complement of full-time payroll employees, we use freelancers to round out our design and production needs.
We absolutely do not put them on payroll. We collect W-9's at the start, and also have them sign a confidentiality agreement that I've modified to include a section on employment status. This section states that they are a freelancer, are responsible for their own taxes, and are not entitled to any benefits. While simply stating this would not be conclusive for the IRS or state, it helps clarify their situation with them and can't hurt with authorities.
At a predecessor company to this, one freelancer was put on payroll (before I started). He worked about half time for us and had other clients. Then the economy went bad, we -- and apparently others -- didn't have any work for him, and so not only had we been stuck paying his payroll taxes, he filed an unemployment claim that we couldn't fight. That's when I added the section to the agreement.
We of course file all 1099's at the end of the year, AND the required dumba** monthly reports on how much we paid them to the EDD. I still have pictures in my head of a mountain of these forms sitting in a warehouse in Sacramento somewhere, never even pulled from the envelopes because budget constraints never left anyone to process them. OTOH, I got a withholding notice for the previous company on a former freelancer yesterday that I suspect was triggered by these, so for once maybe my cynicism isn't entirely justified. :-)
... Of course he hasn't worked with us for two years ...
Never been through an audit.
One thing I should mention is that we don't have any "full-time" freelancers. Some may work 8 hour days while they're here, but rarely do the gigs last over 2-3 weeks, and many are under 1. There's only one person who works for us on a semi-steady basis, and he averages 20 hours per week and has other clients.
Feel free to write either here or directly if I can provide additional information.
Brent A. Byrd Sabatino/Day
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