What is an EDD Audit?

An EDD audit is a payroll tax audit initiated when a former worker you classified as an independent contractor applies for unemployment with EDD.  The EDD thinks you misclassified the worker as an independent contractor and audits your company. 

By Brad Nakase, Attorney

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The purpose of an EDD audit is to make sure a company has wholly supplied the payroll taxes that are legally owed to the state of California. This amount would include the employer’s tax liability and the PIT and SDI taxes necessary to keep from workers’ compensation. In California, the EDD is mainly responsible for collecting payroll taxes from the state’s companies and implementing the state’s payroll tax laws. Payroll taxes include four different kinds of taxes. Of these, employers pay two directly. Employers collect and remit the other two for their employees. These taxes include:

  • Employment Training Tax (ETT): An employer pays a tax that financially supports a state training program for workers in particular industries.
  • Unemployment Insurance (UI): This is a tax paid by an employer meant to pay for California’s unemployment benefits program.
  • Personal Tax: This is a tax employee pay on earned income.
  • State Disability Insurance (SDI): This tax paid by employees is meant to cover the cost of California disability benefits for injured employees.

If EDD is auditing your company, you should contact a lawyer who represents the employer to defend the EDD audit.

What Might Lead to an EDD Audit?

The state of California takes the issue of payroll taxes very seriously because they are a significant funding source for the state. Therefore, the EDD strictly enforces employers’ payment duties through collection and audit proceedings.

That said, the EDD cannot audit each California employer every year. There needs to be more resources to do this. That means that audits will need to be triggered by a particular activity. In general, audits are usually triggered by the following.

The EDD Verification Process

Because the EDD cannot audit all California employers annually, it will do “verification audits” of employers chosen randomly, or that meet particular requirements. This is the only variety of audits the EDD runs that is not triggered by a specific action or accusation of illegal activity.

Independent Contractor Filing for Unemployment

In California, independent contractors are not permitted to receive unemployment benefits. This means that when an employee who received compensation as an independent contractor requests unemployment, they are implying they have been wrongly classified as an independent contractor. The EDD will look into this.

Late Filing of Payroll Tax Returns or Late Payment of Taxes

If an employer does not file their tax returns on time, the EDD may proceed with an audit. Late payments will receive penalties and interest in any case, not only if the EDD conducts an audit.

Failing to Pay Wages on Time or Collect and Remit SDI and PIT

If employees are not paid on time, they will report the violation and their companies to the EDD. An EDD audit will be triggered if an employer does not collect and remit PIT and SDI as they should. How would the EDD learn about this violation? Often, an employee would have to make the allegation, or the failure to collect and remit would appear in the worker’s taxes.

If a company is facing an audit by the Employment Development Department, an EDD audit attorney can negotiate with the EDD on the company’s behalf.

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