You may have heard of EDD audit if you are a California business owner. Or, perhaps you received notices that your company is being audited. Although an EDD audit can be stressful, it is possible for your business to survive and you can take steps to avoid another one in the future. Let’s take a look at EDD audits and what your company needs to do in order to pass them.
EDD audits are when the California Employment Development Department launches an investigation into California state payroll tax records of a business to determine if a worker has been classified as an independent contractor rather than an employee.
Many businesses outsource work to freelancers or independent contractors. Sometimes business owners believe that this is cheaper than hiring employees and providing benefits and a salary. It allows them to temporarily hire someone with special skills.
However, the law has changed significantly and many taxpayers are now liable. Business owners may be held personally responsible for the payroll taxes of employees they consider independent contractors. This occurs when the EDD, after an audit, determines that these workers actually are employees.
This could apply to you if you have ever employed an independent contractor. You could also be subject to a significant financial penalty if your business is not protected.
Here are some steps to follow if your company is subject to an EDD audit.
- Talk to a tax attorney who is familiar with EDD audits. To help you prepare your defense, the attorney will tell you to gather all relevant records.
- You should have all documentation, including employment questionnaires, payroll records and federal income tax returns. Also, bank statements. Wage information for the audit period. It will be easier to pass the audit process with as much documentation as possible.
- Inquiry Regarding Records Notice from the EDD and the Pre-audit Questionnaire must be responded to promptly. These forms should be completed by your tax attorney and submitted by the deadline.
- Discuss any tax liabilities that may arise from the EDD audit with your tax attorney. These tax liabilities could include unpaid taxes as a percentage, dollar amounts for unreported employees and independent contractors, and many other things. An experienced tax attorney can help you to review the audit documents and reduce the assessment.
- Your tax attorney can help you appeal the EDD’s proposed assessment if you disagree with it after the audit.
It can be scary and confusing to receive a California payroll tax audit. Working with a tax attorney and knowing what to expect will ensure that your business is able to withstand the EDD audit.
This article was written by Alla Tenina. Alla is a top tax attorney in Sherman Oaks, CA in Los Angeles California, and the founder of Tenina law. She has experience in bankruptcies, real estate planning, and complex tax matters. The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the ABA and its members do not recommend or endorse the contents of the third-party sites.