What Are the First Steps I Should Take in an EDD Audit?

So the first steps usually taken on an EDD audit are understanding what your risk is. In gathering documents, first gather your payroll records. Is there anything about your payroll records that is out of the ordinary? For most people the actual filing and reporting of their payroll and paying out tax for w2 employees is not really a huge issue. It often relates to wage, hourly or overtime considerations or so on and so forth, but for most people, if you use a payroll company, it's just pretty straightforward. So a lot of times with EDD audits, those first two tests get passed pretty easily. What most risk in an EDD audit is the second couple of tests. It is looking for taxable wages that weren't reported but should have been reported. Payments that are on a general ledger that perhaps should have been picked up as wages, compensation of officers that should have been picked up as wages and wasn't, and the most famous thing in payroll tax audits is the independent contractor and misclassifications issues that happen frequently. That by far is probably the most common red flag and an EDD audit is California going after misclassification issues. But the first thing that you need to do is gather all your documents, assess your risk and then speak with a professional to at least gauge what the reaction is. Whether your understanding of what the risk is matches that of a professional's. Normally the problem that I encounter as a tax attorney is most businesses adamantly believe that their independent contractors are truly independent contractors and the problem is my understanding of what an independent contractor is based on the law in California and how the EDD looks at EDD independent contractors is different a lot of times from our client's understanding of what constitutes an independent contractor. The same thing goes for payments towards officers, the same thing goes for other payments that perhaps should be reclassified as taxable wages. So it's important, like going to a doctor or going to an auto mechanic, to get a second opinion on the risk that you are going to face. That's not necessarily saying that you need to hire a tax attorney although in most situations it's a good idea when there's an element of risk but at least seek the advice of a professional so that you know what you're walking into and do all this way before you contact the statement. The best thing to do is to get your facts in advance, put your strategy in place and then go forth and deal with the offer.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law