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The Lead System and Framing an Employment Development Department Audit

  In California we have what’s called a lead system where the EDD, the state employment tax agency will get a lead from something, then they will send their auditors out to follow up on a lead. The leads are generated from multiple things. They are generated from unemployment claims, they’re generated from a business […]

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Employee Reimbursements in a California Payroll Tax Audit

  One of the biggest problems that we come across in payroll audits is employee reimbursements. A lot of the times what will happen is an employee will get paid a normal paycheck and then they will spend their own money outside the context of the business to buy materials, to buy supplies, go post […]

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How to Defend 1099 Workers in a California Payroll Tax Audit

Number one, is you want to take all the 1099 workers in the business, you want to put them into buckets and determine which buckets are they going to use. Secondly, you want to offer up testimony and/or provide contact information for your best fact pattern within the bucket. We usually take our workers, we […]

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The Real Independent Contractor Test in a California Payroll Tax Audit

  You may be familiar with a 12-factor test or a three-factor test or a lot of different tests that the EDD supposedly uses to classify independent contractors. Through years of professional experience, I’ll just tell you that a lot of this stuff is bogus. What this really comes down to is, it really comes […]

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1099 Worker Verification in a California Payroll Tax Audit

  The next step that the EDD takes in a California payroll tax audit is that they go through and they verify 1099 workers. They’re going to go through each 1099 worker in detail. Even with businesses that have a category of 1099 worker or even if the 1099 is not actually a worker, it’s […]

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Personal Income Tax Test in a California Payroll Tax Audit

  After verifying payroll, they’re going to look at personal income tax withholdings and make sure that the amounts listed match what the state has on file as well. Just to go back and clarify, they’re looking at the wages and the income that the people earned. They’re going through the payroll journal to make […]

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The Payroll Test in a California Payroll Tax Audit

After the initial interview, the EDD will conduct what they call a payroll test. A payroll test is a verification of the business’s payroll posting system. They make sure that payroll is being reported by the business accurately and properly. What that essentially means is the EDD is going to compare their records to the […]

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The Initial Compliance Interview in a California Payroll Tax Audit

  The very first thing that the auditor does is they put you through an initial compliance interview. An initial compliance interview serves a couple of different purposes. Number one, it’s to get background on the client. Number two, it’s to kind of put answers in place in case there’s any problem that come up […]

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Penalties in Sales Tax Audits

  I want to talk now about the penalties that are associated with sales tax audits. Within California, and with most other states, there are two types of penalties. There are mandatory penalties and there are discretionary penalties. Those penalties range anywhere from 10 percent to 50 percent to 75 percent, or potentially greater depending […]

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