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socrateaser
socrateaser, Lawyer
Category: California Employment Law
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Experience:  Retired (mostly)
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My employers workers comp insurance was canceled and he cannot

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My employer's worker's comp insurance was canceled and he cannot find a replacement, so he has decided not to be an employer anymore. He will be subcontracting installation work to another company. I am the only office worker and have been working from my home office for more than a year. He wants me to continue to work for him but as an independent contractor, not an employee. If I do that, can I pay into unemployment insurance myself? And would I then be able to collect UI benefits if the job ends? I do not want to be without that protection.
Submitted: 8 months ago.
Category: California Employment Law
Expert:  LawTalk replied 8 months ago.

Good morning Claudia,

I'm Doug, and I'm very sorry to hear of your situation. My goal is to provide you with excellent service today. Thank you for asking for me.

While you may be working from your home, if you were an employee up until now, it is highly likely that you cannot qualify to be an independent contractor---at least legally, and as far as your employer is concerned. And the idea of being an independent contractor is such that you would really need to be well compensated. You would not have any workers' compensation, you would have to pay for your own unemployment insurance (yes it would be available to you for a price from the state), you would pay 15.3% of every dollar you earn for self employment tax plus pay federal, state and local taxes on all of your income (and even more {18.2%} if you set yourself up to qualify for unemployment benefits). You would have to get a local business license even to work from your home (and pay local taxes on all of your income).

Here is a link to an informational site concerning unemployment insurance for self employed individuals:

http://www.ehow.com/info_8608583_can-business-owners-collect-unemployment.html



You cannot be forced to become an independent, and if you refuse and are let go, then you can collect unemployment benefits now. Unless the employer is willing to pay you at least 30% to 40% more per hour than you are being paid now---then you want to re-think this while independent contractor idea.

Whether you can legally be independent is based upon a number of facts and issues, and while they are a bit complex, I will explain them so you can determine whether it is likely that the IRS would even consider you independent.

A worker is more likely an Employee, than an Independent Contractor, if the worker:

1.Is required to comply with the employer’s instructions about the work.

2. Receives training from the employer.
3. Provides services that are integrated into the business.
4. Provides services that must be rendered personally.
5. Hires, supervises and pays assistants for the employer.
6. Has a continuing relationship with the employer.
7. Follows set hours of work.
8. Works full-time for the employer.
9. Works on the employer’s premises.
10. Does the work in a sequence set by the employer?
11. Submits regular reports to the employer.
12. Receives payments of regular amounts at set intervals.
13. Receives payments for business or traveling expenses.
14. Relies on the employer to furnish tools and materials.
15. Lacks a major investment in facilities used to perform the service.
16. Cannot make a profit or suffer a loss from the services.
17. Works for one employer at a time.
18. Does not offer services to the general public.
19. Can be fired.
20. Can quit at any time without liability.

The IRS looks at 3 primary issues when evaluating whether you are employee or independent:

1.The behavioral control issue: How the employer directs your services provided, and whether the employer has retained the right to control the details of your work.

2.The financial control issue: The IRS looks at whether you can to make a profit from your business---not simply an hourly wage---and whether you can make a profit or take a loss in your business.

3.The nature of the business relationship between the two of you: Is this a strict dealing between the contractor and you-as-a-separate-company?Or, is the title of independent used primarily for purposes of tax avoidance?

Please keep in mind that, even though you have already paid your deposit money over to JustAnswer, until you rate me highly for my service, I will not be paid for having assisted you with your questions.

If you have additional questions, you may of course reply back to me and I will be happy to continue to assist you further until your questions have been answered to your satisfaction.

I wish you the best in your future.

Doug

Customer: replied 8 months ago.

Doug,


 


Thank you for your response. Yes, it sounds mighty expensive, thank you for illuminating that. I read EDD’s form DE 231EC and I read your supplied link, thank you. And it appears that in addition to the 18.2% for Medicare and Social Security, there would be the usual deductions for SIT and FIT and also a tax rate for elective UI and DI and possible ETT (which rates I have not yet identified.) Yikes.


 


Of the qualifying list you presented, 1, 3, 4, 6, 10, 11, 12, and 16-20 apply. 17 and 18 could be mediated by taking on an additional bookkeeping client, which I might be looking for anyway for a little security. Issues 1 and 2 argue for employee status. Issue 3 – the intent is not to avoid taxes, it is just that no workers comp is available and therefore it’s a misdemeanor (as I understand it) for him to continue to have an employee.


 


I cannot retire, and it would be devastating to lose my job because there does not seem to be a legal way to keep it and retain UI coverage - especially since both the boss and I want to continue to work together. So it would help to know I’ve investigated this thoroughly if you could please clarify a couple of points….


 


Are you saying that I could be an employee of my own sole proprietorship even if I had no other employees? The difference seems to be in establishing the sole proprietorship, with proper local business licensing, and applying for an employer identification number and EDD account number, rather than just being “ self-employed.”


 


Will a decision be made at the time I apply for an employer ID number from the Feds and EDD, or elective UI & DI, as to whether or not that alleviates the question of my 1099 status, so that I know clearly that I should either abandon the idea or go forward confidently?


 


My concern is that if I try to put all of this in place, and start paying into the UI program with the expectation that I am maintaining that protection, and then something happens that determines that the working relationship with the boss (now client) cannot continue, and I then apply for unemployment benefits, could my UI claim be denied because my status as a 1099 employee is denied? If that were to happen it would be too late and I would be job hunting while living in my car at age 67. Thrice yikes!


 


When I read Section 704.1 (a)(2) of the CUIC, I realized that if I were to establish the elective UI coverage and later make a claim for unemployment benefits, it would be because my work with the boss/client had come to an end – and that would be the equivalent of having discontinued my regular trade. Wouldn’t that invalidate the elective coverage agreement, even retroactively, especially if that occurred in the first 2 years? Not to mention (5) of the same citation – there would never be a net profit from my sole proprietorship if its only income was the amount of my ‘wages’ charged to my boss/client (a factor of my current wages plus 30-40% to cover additional costs) and the only expense was those same additional costs and wages that I paid myself.


 


I’m not seeing a valid independent contractor with elective UI in this scenario, can you?

Expert:  LawTalk replied 8 months ago.
Good morning Claudia,

I am unable to further assist you in this matter as I am take some time off, and I am going to opt out of your question and open this up for other professionals.

Your question is being placed back in the question list for other professionals to see, and to respond to. You do not have to stay online for the question to be active. Should another professional pick it up, you should be alerted by email unless you actively disable this feature.

There is no need for you to reply at this time as this may "lock" your question back to me, thus inadvertently delaying other professionals' access to it.

I apologize for any inconvenience and wish you well in your future.



Doug
Expert:  socrateaser replied 8 months ago.

Hello,

Different contributor here. Please permit me to assist.

 

Before I begin, I just want to mention that I am extremely skeptical of your employer's claim that he cannot obtain workers' compensation insurance. Perhaps, he simply doesn't want to pay the premiums. But, I shall proceed from the premise that unless you find a way around your employer's intention to have no employees, you will have no job.

There is a fairly easy way to resolve this issue. If you form a corporation for the purposes of leasing employees to other business, and then you lease your services to your former employer, then you can employ yourself to lease yourself to your former employer.

You can also avoid having to pay for your own workers compensation insurance, under the exemption provided to owners of corporations (Labor Code 3351(c); Labor Code 4151). And, you can elect Subchapter S corporate status with the IRS, so as to have all of your income pass through to you each year, regardless of whether you pay yourself wages sufficient to cover all of your profits. This can reduce your liability for FICA, because the pass-through profits are not subject to Social Security Tax.

Finally, corporations are not subject to 1099-Misc reporting requirements, so your "employer" does not have to provide you with any reporting which would ordinarily trigger an audity by either the EDD or IRS.

That's the solution to the problem -- and it's likely the only solution -- because if you attempt to perform work under a 1099-Misc after being an employee, EDD is almost certain to audit your employer and return you to employee status. This can have extremely adverse affects on the employer, because the various fines are huge.

Please let me know if my answer is helpful or if I can provide further clarification or assistance.

And, thanks for using justanswer.com!

socrateaser, Lawyer
Satisfied Customers: 33377
Experience: Retired (mostly)
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