EDD Calculations, Exceptions, and Exemptions
There are special rules for family members who work for you, non-profit organizations, and special exclusions. Some employment types are not subject to PIT withholding, but wages may still be reportable.
People receiving work-relief or work-training financed by any government agency and inmates of a custodial or penal institution are exempted from ETT, UI, and SDI withholdings.
A business owner can apply for a waiver from paying payroll taxes due to reasonable cause, statutory exceptions or undue hardship. Each waiver is considered on a case-by-case basis.
Calculating withholding can get tricky when you must take into account holidays, terminations, leaves of absence and other delays. Communication between the HR benefits specialist and the payroll office is crucial for keeping tax withholding on track.
The EDD and the IRS Are Not Alike
The tax regulations in California are comparable to the federal tax rules but not identical. There are different rules pertaining to family leave and who is held responsible for non-payment of corporate employment taxes.
There are also subtle differences in how each defines employee classification.
Where and When Problems Occur
Employee classification is the area that causes the most problems for business owners. Both the IRS and the EDD are very interested in whether a worker is classified as an employee or as an independent contractor.
An employer must withhold, file, and pay employment taxes for an employee, but not for an independent contractor. The EDD looks at the employer-employee relationship to determine classification.
If a person who hires an individual to perform services has the right to exercise control over the manner, method, mode and means of how the service is performed, the worker is an employee.
Late Filing and Payment
If you file or pay payroll taxes late you are out of compliance and will owe penalties and interest on the amount of tax you owe.
Miscalculations, Underpayment and Changes to the Business
If you miscalculate taxes, you will still be assessed a penalty if you underpay. If you try to conceal the existence of a worker by paying in cash and failing to file a Form 1099, you are also in trouble.
Changes to the business, like closing or expanding, must also be reported for the appropriate amount of taxes to be calculated and submitted without fear of penalty.
The key to any EDD audit is to make certain all records submitted are relevant to the situation. Any records that do not pertain to employment-related issues are not relevant.
Documents that can be requested include:
- Check registers and stubs
- Bank statements and canceled checks
- General ledger and journal
- Annual financial statements
- Vouchers and pay out slips
- Forms 1099
The EDD can decide to audit if a worker makes the case that he or she is an employee rather than an independent contractor (typically found out when the employee tries to apply for unemployment insurance).
Other triggers for an audit include:
- Filing or paying late
- Errors in time records or other statement or documents
- Digital failures that cancel or delay payroll
Many of these audit triggers are rooted in basic recordkeeping and employee classification and are fairly easy fixes. That is why once you survive an audit, it makes sense to implement a payroll tax compliance plan for your business.
As you have read, the payroll taxes collected by the EDD are actually put to good use throughout the state, whether you agree with the disbursement or not. What is important is that your business is in compliance with state laws regarding employment and payroll taxes.
It is always preferable to have your business systems in good working order before you receive an audit notice from the EDD. Usually, at that point, it is too late and the best thing we can do is try to control the audit from your side.
If the EDD has contacted you about an audit, your best reaction is to contact me. We can devise an audit defense to minimize your liabilities. If there is any silver lining to this is that as we go through the audit process, I can see where your recordkeeping and systems are falling short. We can create a compliance plan to shore up those deficient areas and keep you off the EDD’s radar.