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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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. 

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You should hire an employment attorney as soon as you are aware of the issue or believe something is wrong and that the employer is not remedying the issue, such as harassment, wrongful termination, or discrimination.

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Employers in California are not required to provide any PTO, such as paid time off or paid or unpaid vacation, to their employees.

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Is Unpaid Training Legal in California?

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Most employment is generally at-will, so employers can fire an employee for dating a co-worker. However, if the co-worker you're dating was not fired, the employer firing you could be considered gender discrimination, and you can file a lawsuit.

How to report a company paying employees under the table?

A worker can report cash wage "under the table" by hiring an attorney or reporting to EDD. Before you say that the employer is paying under the table, you should ensure that it is illegal because it is not illegal if done correctly.

Can an employer take away earned PTO?

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The standard for proving a retaliation case requires the worker to show that the supervisor's action against the worker might deter a reasonable worker from reporting discrimination or participating in the EEOC complaint process.

Do you get paid for training at a job?

Under California employment law, employers are legally obligated to pay employees for time spent training for a job. It is illegal for employers to require employees to undergo unpaid training.

What is paid time off?

Paid time off - also known as personal time off - is when an employee takes off work while still getting paid by the employer. Likewise, personal time off is when an employee gets paid or unpaid while away from work.

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An employment lawyer help employers and employees understand their respective rights and obligations, such as wages, wrongful termination, overtime, PTO, disability, discrimination, harassment, etc.

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How to respond to a notice of PAGA lawsuit?

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What happens if you get an EDD audit?

An EDD audit is a process of verification that you have correctly withheld and reported personal income tax for wages paid to your employees. If you get an EDD audit, you may be liable for a wide range of fines, interest, and penalties on taxes that you owe.

What are the 4 Caregiver rights in California?

California caregivers are entitled to rest breaks, meal breaks, minimum wage, overtime pay for working over 8 hours per day, and double time for working over 12 hours, including overnight stays. Employers often face lawsuits from caregivers for violating caregivers’ rights, such as basic wages.

Terminating Employee with Cancer

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Can I be fired for work restrictions?

No, you cannot be fired for work restriction if it is based on disability. However, an employer can fire an employee in some situations if the employee has work restrictions.

Annualized Compensation

An annualized compensation is to a predetermined gross pay per month paid to an employee for twelves months, totaling an estimated annual income.  In other words, annualized compensation - also known as annualized salary - is an estimate of how much pay an employee will earn over the course of a year if they were to work the full year. For example, teachers commonly do not work summer months and therefore need to annualized their salary for reporting taxes.

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