What Happens in an EDD Audit

An employer in Southern California may cringe at the idea of their business going through an audit by the California Employment Development Department (EDD). Even if you are certain you fulfilled all the legal requirements, the EDD may still select your business for an audit. Here’s what to expect from an EDD tax audit.

The Two Types of Audits

For starters, knowing which of the two EDD audits is being conducted will help you know how to prepare.

Verification EDD Audit

Businesses are randomly selected for verification EDD audits. This is the preferred type of audit since it does not indicate any faults in your business operations. Businesses may be chosen from a pool of employers that meet the type of selection criteria to be audited, such as one or more of the following:

● Amount of wages paid
● Number of employees
● Location of the business
● Industry type
● Liability during a specific time period

Request EDD Audit

Receiving notice of a request EDD audit indicates that your business operations are under scrutiny. Generally, a business will be targeted due to information discovered by an EDD investigator or outside sources, such as employees or past employees.

Ways to Prepare for an EDD Audit

Getting your records in order will help the audit run more smoothly. An information sheet published by the EDD covers the auditor’s process. Here are three important ways to help keep your records in order for the EDD audit and beyond.

1. File employment tax returns on time.

Keep the EDD from coming after you by filing your tax returns on time. Submitting tax returns late does not reflect well on your business.

2. Keep records of cash payments.

It is good practice to keep a written record of all transactions, including cash payments. If you cannot provide evidence as to why a cash payment was made to an individual, the EDD might deem the cash as payment for services that should be included on the payroll. When making cash payments, always record the receiving party, the amount, the date, and the purpose.

3. Examine your independent contractor agreements.

A major employment law issue involves the misclassification of employees as independent contractors. If this is why your business is being targeted, you will first want to look over the written agreements you have with independent contractors. If you do not have any written agreements, moving forward, always have an independent contractor’s terms and conditions in writing. The EDD will review the working relationship between you and the independent contractor to determine whether the relationship falls under the employer-employee category. Factors such as requiring the contractor to work at specified hours or to attend all company meetings might resemble an employer-employee relationship.

A way to demonstrate the legitimacy of an employer and independent contractor relationship is by providing supporting documentation. An independent contractor can provide their W-9 form, invoices, and business license to you to prove to the EDD that you do not have an employer-employee relationship. It is advisable to obtain copies of these documents at the beginning of the business relationship if you are no longer working with that specific independent contractor.

If the EDD determines that a contractor should be considered as an employee, they will order that penalties and interest be paid to the contractor. If you properly filed your 1099’s to each contractor, this may lessen the penalties to be paid.

Appointment with the Auditor

Once you have gathered all the required documentation for your EDD audit, you’re prepared to meet with the auditor, either alone or with representation. After the auditor evaluates your business practices, they will determine whether your business owes any fines or penalties. Once you have looked the auditor’s findings over, you can decide whether you want to accept or appeal the audit.

It can be complicated to understand what constitutes an employer-employee relationship or determine what documents to gather to prepare for an EDD audit. With some help from an experienced team of lawyers specializing in tax law, your company can easily get through an EDD audit without trouble. K&S Law Group can also provide your business with advice on adopting best practices for taxes.

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