EDD California State Employment Audit
According to the State of California EDD information sheet, the EDD state employment tax audit process “provides education outreach to employers.”
Isn’t that nice? “Education outreach” sounds a lot less painful than “EDD tax audit,” doesn’t it?
The California Unemployment Insurance Code (CUIC) authorizes the EDD to conduct these payroll tax education outreaches on any functioning business in California, to “ensure that benefit coverage is provided for workers who are entitled to such coverage under the law.”
The benefit coverage the Employment Development Department of the State of California refers to includes unemployment insurance, disability insurance, as well as personal state withholding tax, collectively known as payroll taxes.
As an employer, you’re supposed to file your payroll return quarterly, but you also have to send in the money you withheld from your employees every month. You can file and pay online or by mail.
Get a free case evaluation today at 818-649-8552.Why me?
Why did the EDD target you for a state employment audit? Some disgruntled employee may have tipped them off. Or your income tax return for your business doesn’t add up to the payroll taxes you’re reporting, prior employee / independent contractor who filed for unemployment that was misclassified, etc. Even if you didn’t do anything wrong except not reporting payroll taxes by the deadline, just that lateness can trigger an EDD audit.But I’m Self-Employed! Do I Need to pay Payroll Taxes?
Yes. When you’re an employee, your boss pays your payroll tax withholding, but when you’re self-employed, you have to handle the withholding and payment of these same taxes.
The definition of a self-employed taxpayer is this: any person in business for themselves who is not an employee of any other business.
Self-employment taxes are Social Security and Medicare only. The term does not apply to any other taxes. Who must pay? Sole proprietors with a net profit of $400.00 or more annually, and individuals with a net profit of $400.00 annually from a partnership or LLC.What if I Didn’t Keep Great Records?
As an employer, the law requires that you keep some system of records on employees and independent contractors, so if you haven’t been keeping records, start now. Even a basic check register system of bookkeeping will work, as long as you keep records of what your employees earned.What is the EDD State Employment Tax Auditor Looking for?
The auditors will interview your employees and subcontractors and decide whether they are really independent contractors, or they are really employees for whom you need to be paying payroll taxes. The rules for this classification are found at http://www.dir.ca.gov/dlse/faq_independentcontractor.htm
Then they will examine your records to see if you have withheld and reported personal income taxes, etc., on your employees in the right amounts.
Get a free case evaluation today at 818-649-8552.What Could Happen to you in an EDD State Employment Audit?
What if you haven’t been paying payroll taxes at all? What if you had planned to catch up, but never did? And now you’re embroiled in an EDD State Employment Audit. What will happen to you?
Unless you hire an experienced tax professional, EA, CPA, lawyer who is accustomed to working with the EDD on solutions, chances are good they’ll shut down your business. Yes, Really! When you hear in the news that some business has been shut down for tax evasion, it’s almost always payroll tax evasion, not income tax evasion.
And if the auditor decides that you knowingly and willingly withheld money from your employees and didn’t pay your payroll taxes with that money, they could charge you with a crime. Payroll tax evasion is considered a breach of trust. Payroll taxes are also called Trust Fund Taxes. Your employees trust you to take a portion of their money and pay it to the government. The money belongs to the employee, not to you. If you keep the money and don’t pay payroll taxes, that’s stealing.
To make matters worse, the EDD CA state employment tax audit results are sent in to the IRS, which will result in additional federal assessment of taxes.
That’s the bad news. The good news, Mike Habib can help you with your EDD State Employment Audit. He can represent you, assist you in reconstructing your record, and will argue for you that keeping your business alive is better for the government, economy than euthanizing it.What Happens in the Audit?
First there’s an Entrance Interview, during which the auditor will gather general info about your business and tell you the purpose of the audit.
Then the auditor will go over your records of your recently completed calendar year. This is called the Test Year, and if problems are discovered in this year, the audit will be expanded to a 3 year period.What Records Should I Organize in Advance of my EDD State Employment Audit?
According to the EDD information sheet on state employment audits, the following records are required.
- Check registers, check stubs, canceled checks, and bank statements
- General ledger and general journal
- Annual financial statements (income and expense statements, balance sheet, etc.)
- Cash payments records
- Ownership verification records
- City business license
- Board of Equalization sales tax license
- Any license required to operate your business, such as a liquor license, California State contractor’s license, etc.
- Written agreements (for example, PartnershipAgreement or Articles of Incorporation)
- Federal and state income tax returns
- Form 1099 series, federal information returns and worksheets
- Other records may be requested on top of those.
The audit will result in one of the following outcomes:
- No change, because no errors were found.
- You get a refund for an overpayment.
- You’ll be billed for underpaying.
There’s an independent third party, the California Insurance Appeals Board, you can appeal to, or your power of attorney EA, CPA, lawyer. They’ll hold a hearing before a judge and consider your appeal.
You may receive an abatement for reasonable cause, which means they’ll reduce or eliminate penalties, but only in specific circumstances. Some of those circumstances include catastrophe, disability, reliance on erroneous written advice and erroneous refund.
Get a free case evaluation today at 818-649-8552.