California Payroll Tax Problems and EDD Audits

Professional Tax Representation by Tax Lawyers, CPAs, Enrolled Agents

The state of California has a reputation for pulling no punches, and for not taking any prisoners when it comes to taxes. Now, to most that seems perfectly fair. After all, everybody has to pay their taxes, so if somebody fails to do so, they should be punished, right? Well, in theory, yes. The problem however, is that some people are simply not entirely sure how the taxation system works. As an example, if you run a business in the state of California, you will likely have heard of the Employment Development Department, or EDD for short. They are responsible for overseeing the state’s employment taxes, and we shall be learning more about them, and their auditing process, shortly. As a business owner, it is your responsibility to both file, and pay, payroll taxes for each individual under your employment. This may seem burdensome, but trust us, it’s nothing compared to what you may face if you fail to file and pay these taxes, which is why it’s recommended that you hire tax professionals, tax lawyers, CPAs, Enrolled Agents to handle this for you. If you would like to learn more about California payroll tax problems, as well as the EDD auditing process, you’re in the right place.

California Payroll Taxes

We know that the world of taxes can be confusing, even for those of you with a fairly impressive grasp of how the system works. For that reason, we’ll try to keep things as simple as possible, as well explain what payroll taxes actually are. Basically, payroll taxes are taxes that a business owner will pay upon the wages and salaries of every single person under their employment. Payroll taxes are used by the governments to fund things such as unemployment, disability, Medicare, and Social Security.

California Payroll Tax Problems

When it comes to payroll taxes, often you will find that most issues will arise due to disputes with the EDD and their auditing processes, primarily over whether or not employees are indeed employees, or independent contractors who are self-employed. You see, EDD payroll taxation problems often arise when a worker, who, in the businesses is filed as an independent contractor, begins proceedings to file for unemployment insurance. If said worker happened to convince the EDD that he/she was in fact an employee, this would likely lead to an audit by the EDD, and that is where things get tricky.

Professional tax representation by tax lawyers, CPAs, Enrolled Agents

The EDD auditing process

The EDD is a state taxation agency which is responsible for administering the enforcement processes, accounting, and the collection, of the state of California’s employment taxes. If you find yourself being audited by the EDD, the general consensus is that they are far more driven than the IRS. We aren’t trying to scare you here; we’re simply stating the facts. You see, the EDD auditor, from the get-go, will go into the audit with the mind-set that your business is not compliant with payroll tax laws, and therefore they will be doing their best to prove any wrongdoings or discrepancies, whether intentional or not, so as to collect any outstanding payments, or to administer fines for wrongdoings.

What You Should Expect

To begin with, if you find yourself on the wrong end of an EDD audit, they will begin proceedings by sending you an audit document/letter, laying out a list of required documents and info that they will need from you, the business owner. Generally, they will request the following records:

  • General ledger registers
  • Wage info during specific periods in time
  • Employment questionnaires
  • Employee registers
  • Payroll registers

Once this letter has been sent, you will typically have ten days to respond. After receiving said letter, the next step is the audit itself. This is where you will really feel on the spot, as the auditor will ask you all kinds of questions, and will require as much clarification as possible. For example, they may quiz you over the payroll taxes you have filed, they may ask for employee records, they may ask you characterization questions about said employees, and much more besides. When answering, keep your cool, answer honestly, and be patient.

The next step in this process will result in the auditor going over the documents and info they have received, and coming to a decision as to whether or not you are in compliance with payroll tax laws in the state. They will compile a PNA, or Proposed Notice of Assessment, where you, the owner of the business, can then assess it and decide whether or not you agree with their findings. If you don’t, you can provide additional info to help alter the auditor’s findings. If this doesn’t sway their decision however, the PNA becomes a NA, or Notice of Assessment.

If you do not agree with, or accept, the NA, you can appeal with the California Unemployment Insurance Appeals Board, though you must act fast. Again, this is why hiring professional tax services is so useful, because the deadline to appeal is incredibly tight. Failing to make payments/fines on time may result in even harsher interest rates and penalties being enforced by the EDD.

The importance of hiring tax professionals: tax lawyers, CPAs, Enrolled Agents – As you have seen from the above, California payroll tax problems and EDD audits must be taken very seriously. The EDD is far more ruthless than the IRS, so staying on their good side is vital. As a business owner, running your own business is no doubt very time consuming, so the last thing you will need is to be trying to figure out payroll taxes and other similar process. Therefore, it is highly advised that you hire tax professionals and expert representation, and let them handle everything for you. Not only can they get your payroll taxes in order, they can also offer you valuable advice to help you in the future.

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