What Businesses Need to Know About California EDD Audits

 Posted on February 08, 2022 in Tax Audits

California’s Employment Development Department (EDD) handles state payroll taxes, as well as unemployment benefits. While the EDD has struggled to address the large amount of unemployment insurance claims during the COVID-19 pandemic, it is beginning to return to normalcy, and it has resumed payroll tax audits. Businesses that are facing these types of audits will need to understand their requirements, as well as the post-audit issues that they may encounter.

Issues and Records Addressed in an EDD Audit

Audits performed by EDD will review a company’s records to ensure that wages and other payments made to employees have been reported correctly and that an employer is in compliance with its requirements under the California Unemployment Insurance Code (CUIC). An initial EDD audit will generally cover a period of up to 3 years, and it may review records for the 12 most recent quarters. Worker classification is one of the primary issues addressed in an audit, and it may determine whether workers have been incorrectly classified as independent contractors rather than employees. 

A business will be required to provide its records during an audit, usually starting with the following:

• Documents that verify ownership of a company, including business licenses, partnership agreements or articles of incorporation, and its California Department of Tax and Fee Administration number.

• Financial statements and ledgers for the business.

• Bank statements and records of payments made, such as check stubs, canceled checks, or vouchers.

• Federal and state income tax returns.

• 1099 forms for payments made to independent contractors.

Some additional records may also be requested by the EDD to verify payroll payments. These include federal tax reports such as W-2 and W-4 forms and state tax reports such as DE 9 and DE 4 forms.

Based on the results of an audit, an employer may receive a refund or credit for an overpayment of payroll taxes, or differences may be assessed if there was an underpayment. In some cases, both overpayments and underpayments may apply. If no differences are found during an audit, no changes will need to be made.

Post-Audit Issues

Following an EDD audit, an employer may encounter a variety of other concerns, including:

• Federal tax audits - Information uncovered by the EDD during an audit will be made available to the IRS, and based on this information, it may choose to perform an audit of a business to ensure that federal employment taxes were paid correctly.

• Workers’ compensation insurance audits - If an EDD audit determines that workers have been misclassified, an employer’s workers’ compensation insurer may also conduct an audit to ensure that the number of employees and their wage categories and job descriptions have been reported properly.

• Immigration issues - If an audit finds that an employer has employed immigrants who have not received authorization to work in the United States, this may trigger an investigation by immigration officials, and an employer may face fines or other penalties.

Contact Our San Jose EDD Audit Attorney

If your business is being audited by EDD, John D. Teter Law Offices can provide you with legal representation, make sure you turn over the right information, and work with you to address any issues that may arise. We will advise you on the best ways to proceed and the steps you can take to avoid or minimize your financial losses. Contact our San Jose, CA employment tax lawyer at 408-866-1810.

Sources:

https://www.auditor.ca.gov/pdfs/reports/2020-128and628.1.pdf

https://www.edd.ca.gov/pdf_pub_ctr/de231ta.pdf