Call us before the State or IRS wants to audit you for misclassifying drivers as Independent Contractors.

by G. Spencer Mynko, Esq.

Call us before the State or IRS wants to audit you for misclassifying drivers as Independent Contractors.

Recently at Transportation Attorneys, we had a new client retain us to help them get their Owner-Operator, Independent Contractor business model operating and compliant with State and Federal Laws.  This is a great thing to do, but there was a problem.

Unfortunately this trucking company received a letter from the California Employment Development Department (A.K.A. E.D.D.) to schedule an employment tax audit.  In this situation, a former driver who was as an independent contractor (“1099 pay”) decided to apply for unemployment benefits in the State of California.  When EDD processed his application, they noticed his “employer” wasn’t on their roster.  This triggered an investigation and now EDD is going to scrutinize this trucking company.

EDD is responsible for for auditing records of employers to “ensure the proper reporting of wages and contributions for Unemployment Insurance, State Disability Insurance, Employment Training Tax, and California Personal Income Tax withholding purposes.”  “The purpose of the the audit program is to ensure that all workers and wages that are subject to the provisions of the California Unemployment Insurance Code (CUIC)have been properly reported by employers.”


The auditor will review the books and records to: “Verify that all individuals paid for services have been properly classified as either employees or independent contractors in accordance with the provisions of the CUIC and the common law test as applied by the State Supreme Court.”  The auditor will also want to talk to you and the “worker” about the relationship you had.  There are about 36 factors the auditor will look at to determine whether the “worker” was an employee or independent contractor.


Pardon my cynicism, but these people are tax collectors who are working for a cash strapped state desperately in need of revenue.  Chances are the auditor will conclude the company has been misclassifying its drivers as independent contractors, the “workers” are really employees, and will stick the company with a tax bill.   Disagree with the auditor’s conclusions?  Well you can try to settle (i.e.: pay money), or appeal and ask for a hearing in front of an Administrative Law Judge.  If that doesn’t go your way, you can then appeal in Superior Court.  Regardless of what happens, the process is drawn out and expensive.

Finally, “The EDD employment tax audit information is made available to the IRS under an exchange agreement, and the IRS may use the information in the administration of its tax program”.  Need I say more?

We here at Transportation Attorneys can help you with your Independent Contractor business model and your ability to withstand a state or federal audit.  Get your ducks in a row before you get a letter.  Contact today!