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Comment by r3dey3 | Hacker News Reader

At least California is generous enough to require at least 25% of payroll. Most states, if you have even a single employee in that state you need to register as a business in that state (and pay associated filing fees and taxes).

This isn't really news. 15 minutes of reading about staring an LLC in Deleware and you'll find you have to register in the state you live as well - so it shouldn't be a shock you have to file in places you have employees.

1099 is definitely the way to go for as long as you can - people still get social security credit.

IANAL, this isn't legal advice, blah blah blah

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Words of advice, though, if the business is in CA don't hire contractors via 1099 unless the work really does fall under the legal definition of what a 1099 can be used for (in CA). If they appear to be an employee, in any way, then they should be an employee. The CA EDD loves auditing and assessing back taxes and fines. And all it takes is a disgruntled contractor to call the EDD.

>And all it takes is a disgruntled contractor to call the EDD.

Less than that! In the event of a random audit, they will aggressively try to reclassify 1099 contractors that have no interest in being employees and don't meet the definition in any way.

Any idea how CA handles (small) foreign companies hiring contractors in CA?

Assuming they did decide to quibble about the classification what can they actually do to an entity that has no legal existence in the US?

They probably only go after those in the US as they can garnish bank accounts at banks that they can reach as they currently do to Arizona businesses they claimed were doing business in California...

"Making matters worse, if California’s tax assessments are not paid voluntarily, California frequently further tramples on the sovereignty of other states by issuing orders to interstate banks, demanding that they transfer funds in Arizona-based accounts for back payment. Those seizure orders threaten the banks that, if they do not transfer the funds, California will take the taxes and penalties owed from the banks instead. Not surprisingly, the banks almost uniformly consent to California’s strong-arm tactics.

Exhibit G in the filing provides an example where California demanded that Wells Fargo not only transfer the $800 tax, but also a $200 “demand penalty,” a $432 “late filing penalty,” a $79 “filing enforcement fee,” and $63.40 in interest, for a “Total Tax, Penalties, Interest and Fees” of $1574.40."

https://www.azag.gov/press-release/arizona-attorney-generals...

Pretty sure @hnburnsy is right. They're not going to spend the resources to track down non-US entities, I would bet a fair amount of money.

California has a really strict view of what a contractor is, so 1099s are not as feasible as they seem in CA: https://www.dir.ca.gov/dlse/faq_independentcontractor.htm#:~....

IANAL, but if you are building a software product, and you hire someone to do software development work on your core product, then CA may easily take the view that person is an employee because of the ABC test (as of September 2019).

Yes. The ABC test is simple. Someone is an independent contractor only if:

1. You don't tell them what to do, you just negotiate an end product.

2. Your main business is something else.

3. They routinely have other clients.

All three, or they're an employee.

The plumber who unclogs your drains is an independent contractor. Someone who does the work of your business is an employee. It's that simple.

Isn't a plumber just someone providing a service - not an independent contractor? Like if I did 20000K of work with that plumber, I'm not sending a 1099.

Yes, but at scale and in a lawsuit, the court will look at the totality of the situation.

Many companies hire through staffing companies, rather than hiring 1099s directly. But when the contracting company only provides a service to you, and their 1099s are only contracted to your offices, you may find that the employees of this other company are considered to be employees of your company instead. Courts can decide to pierce these abstractions. The most notable example is the Microsoft permatemp lawsuit: https://en.wikipedia.org/wiki/Permatemp

If your company has so much piping that the local plumber hires staff dedicated to you for years on end, then it's conceivable that a court would decide that the plumbing company's employees are actually your employees.

Personally, I've always wondered whether government contractors could win a lawsuit to be considered government employees. The US government is by far the biggest "permatemp" employer and seems to itself regularly flout these kinds of laws.

>Personally, I've always wondered whether government contractors could win a lawsuit to be considered government employees. The US government is by far the biggest "permatemp" employer and seems to itself regularly flout these kinds of laws.

Maybe if this nonsense was actually addressed and made strict, the US government would finally be forced to provide just compensation for it's employees instead of always just shoving piles of money at external contractors and allowing untold grift

If the plumber business is incorporated you are not required to file:

You are engaged in a trade or business and the payment was made to another business that is incorporated, but was not for medical or legal services

Otherwise, you are supposed to file a 1099 (assuming it was trade/business work, not personal stuff for your house, etc).

https://www.irs.gov/businesses/small-businesses-self-employe...

Businesses (or individuals hiring service providers on behalf of their business activities) are required to provide 1099s. 1099s are not provided for services provided for non-business reasons.

The ABC test itself may be simple (though rule B seems open to interpretation as to what it means to " ...perform work that is outside the usual course of the hiring entity's business."), but figuring out where the ABC test applies is not simple; they quickly realized that applying this test across the board would completely decimate a bunch of legitimate industries, and so they carved out a wide swathe of exceptions.

For example, see https://www.nolo.com/legal-encyclopedia/exempt-job-categorie....

Software consulting probably (IANAL) falls under "Business to business consulting", at least if you structure your consulting shop correctly. If you're just working long-term full-time for one client and not offering your services up elsewhere as the GP's case describes, you're probably mis-classified under the ABC rule.

All part of California is war against small businesses and independent contractors.

They absolutely hate orgs and individuals that provide an alternative to California's onerous requirements and don't pay into the state funds

How do Facebook et al get away with hiring contractor platform moderators?

It certainly doesn't pass this contractor requirement...

"The worker performs work that is outside the usual course of the hiring entity’s business"

They probably don't have any in California, or they engage a company to provide moderation services for them.

They're in the Philippines.

Just FYI, the California EDD has some absolutely ridiculous ideas on what qualifies someone as an employee vs 1099 contractor that extend well beyond what the IRS considers, and frankly, well beyond their own written law in the event of an audit. They audit extensively and intrusively on that issue as well.

It's absolutely absurd.

Now is the time for anyone to get California in front of Clarence Thomas.

"The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States."

A sole owner of an Illinois business could be read in that text to have immunity from the California "minimum franchise tax."

It would be helpful to see the Supreme Court remove California's abusive interstate taxation.

The Privileges and Immunities clause has only been interpreted once by the Supreme Court and only (so far) protects the right to interstate travel (on your own two feet, BTW). It has never been held to forbid interstate taxation, and in fact, the right to interstate taxation was recently expanded in South Dakota v. Wayfair, Inc. (2018) when the Court was already conservative-leaning.

The plain text of the Constitution often does not mean what laypeople think it means.

> The plain text of the Constitution often does not mean what laypeople think it means.

"We the people" does not seem to be written for Ivy League lawyers to understand and translate to laypeople. A Constitution written in a way that only a small percent of people are "trained" or "authorized" to understand or apply is a big time failure. Just sayin'

The problem is not the way the Constitution is written. It's a bunch of people who think that their understanding of, for example, "Privileges and Immunities" is obviously correct.

The constitution was pretty clearly, from day one, written by educated 1%'ers, FOR educated 1%'ers. It was never meant to protect or privilege the laypeople except by accident and vague notions of "everyone deserves rights, except for those that improve self governance, only white landowners deserve that"

The P&I clause simply means that states can't discriminate against people from other states. This was explicitly clear in the original (Articles of Confederation) version of the clause, which stated that citizens of one state traveling to or doing business in other state were "subject to the same duties, impositions, and restrictions as the inhabitants thereof."

This means, for example, that if a state wants to tax residents of other states that do business in their state, they have to tax their own residents for the same activities.

So, if CA wants to tax an Illinois business for its activities in CA, it would have to tax CA residents for those same activities. And CA absolutely does.

I’d say the opposite, that businesses large and small have perverted the concept of “independent contractor” to just mean “lower class worker we can pay less & treat as disposable.”

Thats not to say there isn't tons of “real” contractor work available to people who actually work independently.

But it only takes like 5 minutes to read the IRS 20 factor test and it pretty much immediately makes it clear what’s a “real” contractor relationship and what isn’t. IMO people running a serious business shouldn’t have a problem doing the most basic research to make the determination.

To be super clear, California’s ABC test is only 3 factors and it codifies that those 3, which are already in the IRS test (A is 1, B is 3 & C is satisfied by 17 or 18). It mandates that these 3 (out of the 20 supplied by IRS) in particular must be present, clearing up the existing rules.

What you just said is almost a verbatim summary of what my naive understanding was before watching my business partner undergo an EDD audit earlier this year where I myself was scrutinized heavily and interviewed by the EDD, having done some 1099 work for this guy. (And, the audited year was actually BEFORE the CA ABC test came into effect.)

What I'm trying to communicate is that this understanding will NOT sufficiently protect you from the CA EDD. It goes MUCH deeper than the above and they have no problem making assertions that probably would not stand up in court if you hired a tax attorney, but they don't really care.

> 1099 is definitely the way to go for as long as you can - people still get social security credit.

The "danger" with a 1099 isn't that you don't get social security credit, it's that there's no withholding, so the recipient has to pay all of the taxes after the fact (instead of getting a refund come tax time like most? many?).

It shouldn't be a problem for someone used to this and plan/save accordingly, but it's easy for someone new to contracting to fall into a trap of "OMG, look at all this money!! I'm going to go buy something expensive..." and spend everything, without considering their tax liability down the road.

And they have to pay a self employment tax

> The "danger" with a 1099 isn't that you don't get social security credit

What do you mean? You still pay in but you have to pay 100% yourself instead of having the company pay half.

Why was this post downvoted? That's my understanding too, the "self employment" tax replaces what the employer would have paid. Is this not the case?

It is the case. If you are being paid as 1099 you need to ask for more money because of this shift in tax burden.

Yeah, I assumed that was common knowledge, and is one of the reasons 1099 hourly pay is typically greater than W-2 hourly pay. (other reasons include that you don't typically get PTO, health insurance, retirement account, etc)

It's common knowledge to those who have been burned by it.

Many haven't yet, and many people can get "tricked" into it - there's a reason the government has to stomp on companies that try to 1099 everyone.

Doesn't that apply to all sorts of employee compensation? ISO's vs RSU's, employee stock purchase/matching programs, PTO options ("unlimited PTO" in particular can be bad for the employee), health insurance options, 401k contributions.

All can have big financial impacts to employees, and employees need to understand them before they accept an offer. There's no reason to be surprised by the tax implications of 1099 vs W-2.

1099 isn't necessarily worse than W2, it opens more tax deductions for the employee, but also requires more bookeeping and the employee needs to understand what the difference is.

Yeah, and many of those things are used by unscrupulous companies to take advantage of those “not in the know”.

It can be hard to find the exact details for comparison which is why it’s good to have contacts in an industry and in an area.

I had to go through this process once. Large multi-national didn't wanna do the whole paying the state thing(thats reasonable) and I was the only employee moving to that state.

They ended up classifying me as a "contractor" working under one of their existing agency relationships but aside from who signed my paycheck there was no distinction

> 1099 is definitely the way to go for as long as you can - people still get social security credit.

Dirty secret of remote work is that lots of companies are abusing the 1099 system to make it happen. The workers definitely don't meet rules for being 1099, but tax compliance (not to mention sorting out benefits) across a whole bunch of states and even countries is crazy overhead, so the realistic options are to make everyone 1099, or to only hire from one state.

... then again, a bunch of bigcos abuse 1099 for non-remote employees all the time and have for years, so, not like this is unique to smaller all-remote or remote-friendly companies.

Registering as a business in a state though is usually an activity that takes 15 minutes and around $100. If you are doing enough to have a few employees, paying an accountant type to do this for you is very cheap and quite easy.

Last I looked years ago, it was $800 per year in California. (It's $100 in the state I live in now, though.)

Yeah most states will be more like $100, even $800 though... if we're on hacker news and probably talking about tech workers... it is still a tiny amount of overhead cost.

Doesn't the "overhead cost" entirely depend on the business size, scope, location, employees, etc.? $800 is a lot of overhead for many tech companies.

If you’re hiring a tech worker in California, $800 is likely a day or two of reasonable cost for that one employee.

Even a minimum wage employee working full time will cost that much in a week or two.

It really depends. If you want to try out a small side biz venture or hot dog stand, $800 is a lot of overheard.

I feel for people who are on the lower end of the income scale that that try to do basically anything is California's hostile business climate.

An out of state LLC registration in Texas is $750, plus you have to give them a credit card up front, so they can charge you $1 per name search on a web forum to ensure that your business doesn't conflict with any existing business. Though, they will refund that money if you end up registering. Mostly, this is to say that even in "business friendly" states like TX, registration isn't necessarily cheap or friendly by comparison.

But that's exactly what OP is complaining about, they didn't register their business. If you have any presence in a state, including employees that are residents and working there, you should be on notice that you need to 1) tell the state that you're doing business in their state by registering your business (simply paying your employee is doing business!), 2) file a tax return from income derived in that state, and 3) adhere to the laws (including employment laws) of the state. That someone started a business and didn't know this is itself surprising because it implies that they didn't ever talk to an accountant or a lawyer but somehow had the wherewithal to hire an employee as a W2 employee.

Imagine the opposite: you set up your business out of state and employ California residents but don't follow any of their labor laws. You underpay them. You don't take out the appropriate amount of state taxes. You don't report their income to the state. You don't give them overtime pay. How is this not just a glaring problem?

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