Employment Development Department

California’s Employment Development Department (EDD) has the right to audit businesses to ensure that employee payroll taxes are being paid correctly, for the right personnel. The California Supreme Court decision in April 2018, which expanded the definition of employees, makes businesses that hire independent contractors especially vulnerable to EDD audits. The decision ruled that companies do not have to pay employee payroll taxes or withhold employee income taxes for independent contractors but must still do so for employees. Therefore, if the EDD suspects that your business may have misclassified employees as independent contractors, you and your company may be liable for substantial taxes and penalties.

There are two main types of audits that the Employment Development Department usually conducts on a company.

If your company receives a “Request Audit” notice from the EDD, it means your business is on the EDD’s radar. But, how did this happen? A notification for an EDD “Request Audit” often arrives after the EDD investigators have gathered enough information regarding suspected violations, usually from your current or former workers.

On the other hand, if you receive a “Verification Audit” from the EDD, your business may be safe from any liabilities. This type of audits usually occurs randomly and is considered to be more of a routine audit to verify certain details.

tax professional

Whether or not you choose to hire an attorney, you must be honest and respectful when responding to the Notice of Audit’s initial document request and questionnaire. By law, you are required to keep certain documents – such as 3 years’ worth of employee payroll records – so you should be able to produce the documents requested with ease. Claiming not to have them could open the door to further problems.

Hiring an experienced employment attorney can go a long way in protecting your company from liabilities and unfavorable EDD audits. Our employment attorneys can help you navigate EDD audits and any other business law concerns you may have.

Whether you are just starting a brand new company, run a “mom & pop” business, or already have a large established corporate enterprise, we are here to grow with you and meet your legal needs.

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Cindy Flynn