EDD FAQ
Some of the most frequently asked questions RJS LAW addresses when advising clients on EDD matters | EDD FAQ.
Why is the EDD Auditing Me? EDD FAQ
The are many reasons the EDD may choose to audit a particular employer. Sometimes the audit is purely random. Sometimes the EDD focusses on particular industries or particular sectors. Sometimes a workers compensation claim or a claim for unemployment benefits can trigger an audit. Other times, an audit flag may trigger an audit such as having a large number of independent contractors.
What is the EDD looking for when it audits my business? EDD FAQ
The two major issues the EDD is usually looking for are misclassified workers and workers getting paid under the table. Misclassified workers are workers a business treated as independent contractors for payroll tax purposes, but should have been treated as employees for payroll tax purposes.
When it comes to workers getting paid “under the table,” the EDD is not just looking for employers who hire day laborers and pay them cash, the EDD is also looking for payments made to business owners or people related to business owners For example, if the business is making payments to the relative of a business owner, the EDD may consider these payments to the relative could be considered “under the table” wages the business should have paid tax on.
What is AB5?
AB5 is a law the California Legislature passed that went into effect in 2020. Under AB5, workers are generally considered employees (rather than independent contractor) unless the workers pass all three prongs the ABC Test. The ABC test requires:
- The worker is free from control of the hiring entity;
- The worker provides work that is outside the usual course of the hiring entity’s business; and
- The worker has an independently established business.
What is the ABC Test
As part of the AB5 legislation that went into effect in 2020, workers in California will generally be considered employees, unless they pass all three prongs of the ABC test. The ABC test requires:
- The worker is free from control of the hiring entity;
- The worker provides work that is outside the usual course of the hiring entity’s business; and
- The worker has an independently established business.
I disagree with the results of my EDD Audit. What do I do?
An EDD Auditor does not have the final say in your matter. Appeals are available through the California Unemployment Insurance Appeals Board (CUIAB). You do however want to make sure you file a timely appeal. Your business generally has 30 days from the date of the final audit notice to appeal EDD findings.
A big portion of my bill is interest and penalties. Can anything be done about that?
Some EDD penalties can be waived if there is a showing of reasonable cause. For example, if you relied on your accountant to provide you with accurate payroll tax advice and your accountant erred, you may be able to waive some EDD penalties.
What does the EDD look at during an audit?
The EDD typically looks at business records such as bank statements, payroll records, and income tax returns to verify the information reported on EDD DE9 and DE9C returns is correct. The EDD may also interview workers and even look to social media pages to verify information reported on EDD returns.
What does my business need to do to treat a worker as an independent contractor?
After the passage of AB5, it is difficult for businesses in California to treat most workers as independent contractors. Any business that is contemplating treating any worker as an independent contractor should seek legal advice. Among other things, businesses that treat workers as independent contractors will need formal written agreements with the workers that comply with AB5, they will need to ensure the independent contractors have all required licenses, and they will need to verify the independent contractors have an independently established business.
I got a huge bill from the EDD and I cannot pay it. What do I do?
If you are unable to pay your EDD bill, the EDD offers various payment arrangements. Businesses generally have to submit a financial statement to make payment arrangements and the payment arrangement will generally be based on the business’ ability to pay.
Can I settle or negotiate my EDD balance?
The EDD does have an Offer in Compromise program. This allows taxpayers that owe the EDD money to settle the balance for a fraction of the total amount owed. The EDD will not consider an Offer in Compromise if the business is still in operation. Like any Offer in Compromise program, most taxpayers will not qualify for the EDD Offer in Compromise.
My corporation or LLC owes money to the EDD. Can I be personally responsible?
The EDD can assess individual for the tax debts of corporations or LLCs. An individual can be personally liable for the EDD debt of an LLC or corporation if (1) the individual had control over the finances of the LLC or corporation and (2) the individual directed the LLC or corporation to pay money to any other expense rather than EDD payroll taxes. Usually, the owner or owners of a business are the individuals who are deemed to be in control of an LLC or corporation. It is possible for a person who is not an owner but holds a position such as CEO or CFO to be deemed in control of a business.
The EDD does not necessarily show any malice or fraudulent intent to prove a person is personally liable. All the EDD needs to show is the person directed money to any other expense other than EDD taxes, even if these expenses were reasonable or necessary to keep the business open.
Can I got to prison for not paying my EDD taxes?
Business owners that violate criminal statutes can face criminal penalties that can include prison time. This is not to say everybody with an EDD payroll tax issue will face criminal charges or face prison time. In fact, most people that have EDD payroll tax issues do not go to prison. You should consult an attorney if you have concerns about criminal charges. Communications you have with your accountant and other non-attorneys are not privileged and could possibly be used against you in a criminal proceeding.
I was contacted by an EDD Agent. What do I say?
The best answer to this question is nothing. Retain an attorney and have the attorney handle all communications for you. If you want to handle the issue yourself, make sure you fully understand all the questions being asked of you. Obtain clarification for any questions you receive and ask the EDD agent to define words you do not understand. You should also make sure every answer you give is an accurate answer and take time to research and double check any answers you give rather than give an answer on the spot that may not be accurate. Communicate in writing when possible.
Is the EDD looking at my business’ social media page? EDD FAQ
The EDD does look to a business social media page to determine whether a business’ payroll tax returns are accurate. For example, a business may have pictures of supposed employees on its website that are not listed on its payroll tax returns.
Some of my employees or their families have immigration issues. Will EDD share information about my business’ with ICE? EDD FAQ
The EDD does not directly share information with ICE at this time. California businesses still must comply with all applicable laws.