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 sure that the total wages is going to match. Now they’re going through it and examining the tax portion of that.
Just like with the income side of things, they’re going to look at the tax that was withheld and make sure that matches. They’re going to go to the W2, they’re going to look at the federal income tax withheld, they’re going to look at state tax withheld, on a payroll tax level. Then they’re going to go through and they’re going to look at the report fillings to the state and then they are going to look at what was reported with the employee.
A lot of the times you’ll see that they ask for a W4 in a payroll tax audit. What they’re doing is they’re looking at the information that the employee reported to the employer originally. They’re verifying any exemptions and any marital status, and basically verifying that there’s being proper withholdings on the employee’s end. They’re verifying that to check on the employee’s records to make sure the employer’s records are correct.
After doing a sample of an employee, the EDD will usually go a step further and they will reconcile the total payroll to total wages and make sure those two match. Usually, there is a year-end summary that is performed, that is filed with the state. In California, it’s a DE 9. They will verify that information and that that matches the payroll journal just to make sure that the total payroll is accurate. They take a sample, they make sure the sample’s okay, then they look at the total. As long as the total is okay, and the sample is okay, then you’re usually fine.
Occasionally, the EDD will break it down on a quarter by quarter basis. They will actually go through and look at wages that were being reported within a given quarter, and they’ll go quarter by quarter for a year or for a half year, and they’ll run a verification test that way. Then they’ll go back and look at what was reported on the payroll journal, and they’ll look at what was reported on the payroll tax returns.
If everything matches, no problem. If it doesn’t match, then what it will do is usually trigger up opening other years, and they’ll go through and they’ll verify everything. In most situations, you’re going to see consistent reporting between payroll tax that was reported and wages that were reported. It’s only when you have a situation where there has been poor financial controls, or there’s been a change in accountants where you may have some reporting discrepancies.
As a practitioner, even though this test is usually passed pretty easily, you do want to go through and double check the payroll journal against any state and federal tax filings just to make sure that everything is correct to mitigate any issues. If there are problems that come up, you either want to explain them or to be able to concede the discrepancy to the state. You’re going to want a little street credit with the auditor if you come in and kind of know their test ahead of time.