What Are The First Steps You Should Take in the EDD Audit? So the first steps usually taken on EDD audit is understanding what your risk is in gathering documents so 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 can be and what it is it's a mass and that often relates to wage an hour or overtime considerations or so on and so forth but for most people particularly, 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 is it risk in an EDD audit it's the second couple of tests it is looking for taxable wages that wasn't reported but should have been reported, so payments that are on a general ledger that perhaps should have been picked up his wages compensation of officers that should have been picked up as wages and was it 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 miss classification issues but the first thing that you need to do 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 professionals, so normally the problem that I encounter as a tax attorney is most businesses adamantly believe that they're independent contractors are truly independent contractors and the problem is 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 much different a lot of times from our clients 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 get a second opinion on the risk that you are going to face 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 that 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 then deal with the offer.