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Patrick, Esq.
Patrick, Esq., Lawyer
Category: California Employment Law
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I have newly formed an s-corporation to provide medical practice

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I have newly formed an s-corporation to provide medical practice management services. I have two clients, but my former employer does not want to use my services because he's afraid that he'll be audited by California EDD and fined for wrongfully using me as an independent contractor when he should be paying me as an employee. The scope of my services is largely self-directed, I have my own office and business address, and I have other clients. He will not be paying me. He will receive a bill from my corporation. I'm not making an outrageous amount of money. Is there really any exposure?
Hello and thank you for entrusting me to answer your question.

Whether an individual is operating as an employee or contractor is ultimately a "question of fact," meaning that is turns on the unique circumstances of each case. There are no black and white answers--instead, there are a variety of criteria which courts examine to determine whether the worker is sufficiently autonomous so as to warrant independent contractor status.

The most commonly considered criteria consist, in part, of the following:

1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal or alleged employer;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7. The length of time for which the services are to be performed;
8. The method of payment, whether by time or by the job; and
9. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

In consideration of the above, the facts you describe would tend to suggest that contractor classification would be proper. You indicate that you would retain a large degree of control over your work. You have formed a corporation and are providing your services to a number of different clients. This paints the picture of an autonomous worker.

The only real red flag is that you'd be working for your former employer, which would suggest that the service you are providing is no different than the service you provided as an employee before. Accordingly, your time would be well spent thinking of ways to distinguish between your past job and the present services you are offering as an independent contractor. The more you can differentiate, the less likely that your transition to independent contractor status will raise an eyebrow.

Lastly, although it is not controlling, an employment contract which classifies your employment relationship as between "contractors" would have influence in the unlikely even of an audit.

Of course, since contractor/employee determinations are "questions of fact," the result in particular instances can never be predicted with certainty. However, as a separately formed corporation with other clients and with significant control over the manner in which you perform your work, it would be hard to imagine an individual in your circumstance being classified as an employee unless the substance of your work was identical to what you did as an employee.

Please do not hesitate to let me know if you have any questions or concerns regarding the above and I will be more than happy to assist you further.

If you do not require any further assistance, please be so kind as to provide a positive rating of my service so that I may receive credit for assisting you. Very best wishes to you and thank you so much for coming to Just Answer.
Customer: replied 4 years ago.

Thank you for the information. What would trigger an audit?


Thank you for your reply. First of all, less than 1% of small businesses are audited each year by the IRS, so the odds of a tax audit that would scrutinize your independent contractor relationship with your former employer are slim.

Most of the time when a contractor is found to have been misclassified, it is the result of worker wage claims, unemployment benefits claims, or other worker-generated complaints and NOT from audits.

The precise criteria used to determine audits is not somethign the IRS readily shares. A lot more goes into the decision to audit a business than suspected misclassified workers. Sloppy tax returns, claimed losses, business write-offs, etc. are the traditional triggers.

I will acknowledge that reporting 1099 wages to a formerly classified employee is itself a red flag, but I'm not even sure this would come into play if your former employer was paying your corporation, whicc would presumably have its own employer tax ID number.

This is a bit scattered but I hope it provides some clarity.

Again, please feel free to let me know if you have any further concerns. If I have answered your question, I would be very grateful for a positive rating of my service so that I may receive credit for assisting you.

Kindest regards.
Customer: replied 4 years ago.

Thank you so much for your information. It was really helpful in gauging the risk to my clients. I appreciate your courtesy and encouragement.

You are very welcome! It was truly my pleasure to assist you.

Have a great evening, and good luck to you in your business endeavors.
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