As a business owner in California, it’s essential to be aware of the Employment Development Department (EDD). They’re the state taxing authority and the enforcers of California’s tax laws. Failure to follow legal practices can lead business owners to tax audits. Fortunately, we have five ways to mitigate the risk of an EDD audit that can help you.
Correctly Classify Your Employees
One of the fastest ways to prompt an EDD audit is to classify employees incorrectly. As an employer, you must categorize workers as employees or contractors. One of the differences is that you pay employees wages, and they’re typically under a contract that explains their role within the company. In contrast, contractors are free from the control and direction of the hiring entity. To avoid an EDD audit, it’s best to follow the “ABC Test” to classify workers correctly.
Fairly Pay Wages
Another thing that can alert the EDD is inaccurate wage payments. It’s critical to stay updated with federal guidelines for minimum wage and overtime. California has strict minimum wage laws that all employers must follow compared to other states. Failure to pay an employee an appropriate hourly wage will trigger an EDD audit.
Accurately File Taxes
It’s your responsibility as an employer to withhold correct income, employment, and payroll taxes. In addition to accurately filing taxes, you must file quarterly reports with EDD and provide the required documents and forms. Submitting late, incomplete, or inaccurate forms can raise suspicion, prompting an audit.
Keep a Record of Everything
One of the best things you can do is to keep a record of everything. From accurate payroll and tax records to subcontractor agreements, it’s best to document all business activity within your company. It’s important to note that the EDD performs random audits. But if you’re following the best business practices and keeping current records, you won’t have to worry about penalties from the EDD.
Avoid Fraudulent Practices
Paying workers under the table or reworking timesheets to avoid paying overtime are fraudulent practices that will result in an EDD audit. It’s always best to accurately pay and report everything because committing fraud is a serious federal offense. Not only can you risk losing your business, but you can face legal consequences.
The EDD is California’s taxing authority that all businesses need to be aware of and follow the best legal practices. To avoid an audit, always refer to our list of five ways to mitigate the risk of an EDD audit. However, if you’re facing an audit and need a tax audit defense lawyer, contact Pershing Square Law Firm. Our team of experienced lawyers can help you face an EDD. If you have any questions, call us today!