Our EDD & DCA Audit History:
Disclaimer: We are not Attorneys nor do we represent a business during or after an inspection or audit - Our consulting services do not constitute legal advice nor do they establish an attorney-client relationship.
In California, payroll taxes are administered by the California Employment Development Department or EDD. More EDD inspectors or auditors are coming to “Personal Services Industry” type businesses to find violations of the labor laws.
The main goal of the auditor (or inspector) will be to find a mistake in your business operations that will allow the auditor to categorize all persons as employees. Once this has been done, the businesses will owe payroll taxes resulting in very large fines (typically $250 per violation/worker/week) and only 7 working days to respond in writing. Their inspection focus will be based on whether or not you can prove if the workers are not employees but independent contractors. Negative inspection findings that result in the reclassifying of workers, as employees will cause many serious payroll tax problems. In California, if your business has federal payroll tax problems it will generally also have California payroll tax problems. Likewise, a California payroll tax problem almost always becomes a federal payroll tax problem.
Historically, EDD payroll tax problems started when an Independent Contractor (who is classified by your business as an Independent Contractor) files for unemployment benefits. If the Independent Contractor is successful in convincing the EDD that they are or were your employee, it will cause a California payroll tax audit from the EDD.