The more I work with the EDD and see the court cases, the more I think the answer the question is – NO, you cannot be an independent contractor in California!
The IRS has a 20 point test to figure out whether you are an independent contractor or an employee. Some of the things it looks at is control, whether you have other clients and advertise yourself as a business, whether you set your own hours and your skill level.
California, it seems, has thrown this out the window and is focusing on two issues:
First, are the services you are providing integral to the business.
And, are you paid by the business.
The CA courts just ruled that the individuals working for Uber are employees because they are integral to the business. And to talk from personal experience, I just had a case where the EDD ruled that music teachers were employees of a music studio because they were integral to the music studio and they were paid by the music studio (not by the students directly). They ignored lack of control, having another business which was advertised to the public, having outside students and the other factors in the 20 point IRS test.
To make it even worse, I asked the EDD auditor “what about the following situation?” – I assisted another CPA during tax season a few years ago. I have my own CPA license and prepare over 200 tax returns annually. I went into his office whenever I add extra time and prepared tax returns without any supervision whatsoever. I asked her if I would be considered an employee and she said probably, because I was integral to the business and I was paid by the CPA not his clients!
So what do you do about this? Setting yourself up as a Corporation or other legal entity other than a sole proprietorship would probably solve the problem, but that creates other issues. And it creates the interesting scenario that two consultants could be doing exactly the same thing but the sole proprietor would be considered an employee and the other consultant, operating as a Corporation, would be a contractor.
The other thing I recommend to everyone is to get a business license from anyone you are thinking of hiring as an independent contractor. This isn’t written in any of the books, but in my mind if someone does not have a business license, which is required by most cities, then you cannot treat them as an independent contractor. If they hove a license, then you can start looking at the other tests.