California Payroll Tax Audit

Once you have your files together for each independent contractor or if you have strong evidence that these people are independent contractors, the next phase is preparing your contractors to be contacted and potentially interviewed by the EDD auditor. You need to be careful here, very careful, because you are walking a fine line.

However, best practices in California dictate that you should gather about five people that are your best sources for 1099 information and create a reference sheet for the tax auditor to reach out and contact them.

The reaction that you are going to get from the tax auditor will be a mixed bag. Some auditors appreciate the help and some will buck a little because it appears that you might be trying to control how you are running their audit.

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The auditor’s first goal in an independent contractor audit is establishing a system and a pattern of routine for the business’s operations. For example, if we have a retail store and the retail store has two locations, in each location, we have anywhere between five and seven employees at a time.

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In this article, we are going to dive into the nuts and bolts of how to really prepare for a 1099 Independent Contractor Audit and potential misclassification issues.

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Internally, we have developed the following list of issues based on our experience in past EDD payroll tax audits. Although not an exhaustive list, it will give you an idea of some of the mistakes that we have seen in preparing for audits and things to generally look out for.

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Documents You Will Need for the Tax Auditor

What usually happens in a payroll tax audit is that the auditor will send you a laundry list of documents that they want to examine. Of the different types of audits, payroll tax audits are usually the ones that have the most flexibility because in a payroll tax audit they are basically running tests.

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