If your business is being audited by California’s Employment Development Department (EDD), the first question you need to answer is, “Why?” Not only will figuring out what triggered the EDD audit help you defend against the audit itself, but it will also allow you to determine if your business is at risk due to potential violations that are not specifically related to payroll tax liability.
Why Does the California EDD Audit Employers?
The California EDD holds primary responsibility for administering the state’s payroll tax laws and collecting payroll taxes from employers. This includes four separate types of taxes, two of which employers pay directly, and two of which employers collect and remit on behalf of their employees:
- Unemployment Insurance (UI) – An employer-paid tax intended to cover the costs of California’s unemployment benefits program.
- Employment Training Tax (ETT) – An employer-paid tax that funds a state training program for workers in certain industries.
- State Disability Insurance (SDI) – An employee-paid tax that covers the cost of California disability benefits for employees who get injured or fall ill.
- Personal Income Tax (PIT) – An employee-paid tax on earned income.
When the EDD conducts an audit, the purpose of the audit is to determine if an employer has fully paid the payroll taxes it owes under California law. This includes the employer’s direct tax liability as well as the SDI and PIT taxes it is required to withhold from employees’ compensation. As summarized in the EDD’s Information Sheet for the Employment Tax Audit Process:
“The payroll tax audit [EDD audit] verifies compliance with the [California Unemployment Insurance Code (CUIC)], ensures workers are properly classified, payments made to employees are properly reported, and protects workers’ rights to receive benefits.”
Since payroll taxes are a significant source of funding for the State of California, the EDD aggressively enforces employers’ payment obligations through audits and collection proceedings.
What Triggers California EDD Audits?
Even so, the EDD simply does not have the resources to audit all California employers every year. As a result, EDD audits are typically triggered by:
- The EDD Verification Process – While the EDD does not audit all employers, it does conduct “verification audits” of companies that are selected at random or based on certain criteria. A verification audit is the only type of EDD audit that does not arise out of a specific event or allegation of unlawful conduct.
- Independent Contractor Filing for Unemployment – Workers who are properly classified as independent contractors are not eligible for unemployment benefits in California. When a worker who was paid as independent contractor files for unemployment, this means that he or she (knowingly or unknowingly) is claiming to have been improperly classified, and this can raise a red flat with the EDD.
- Late Filing of Payroll Tax Returns or Late Payment of Taxes – Failing to timely meet your filing or payment obligations can trigger an EDD audit. Late payments are subject to interest and penalties regardless of whether they are revealed in a delinquent filing or through the audit process.
- Failing to Pay Wages on Time or Collect and Remit SDI and PIT – Employees who do not receive their wages on time will often report their employers to the EDD. Apparent failure to collect and remit SDI and PIT (as alleged by an employee or revealed in employees’ personal income tax filings) is a common trigger for EDD audits as well.
Are You Facing an EDD Audit? Our Southern California Tax Attorneys Can Help.
If your company is being audited by the EDD, our tax attorneys can deal with the EDD on your company’s behalf and ensure that you are not wrongfully accused of underpaying California state payroll taxes or misclassifying your workers. To learn more in a complimentary initial consultation, give us a call at 619-595-1655 or contact us online today.