Navigating the intricacies of Employment Development Department (EDD) audits and worker classification can be a formidable task for any California employer. However, staying informed is the first line of defense in ensuring compliance and avoiding potential pitfalls that could lead to significant financial consequences. This article covers what an EDD audit examines and how worker classification is assessed.
Why Would the EDD Decide To Audit Me?
An EDD audit does not necessarily signal wrongdoing but can stem from various triggers. Sometimes, the EDD will select your business based on pure random chance, while other times, it may perform an audit because someone you classified as a contractor sought unemployment benefits.
That worker may also claim that you did not pay them the money you owed them. The department can also decide to audit your business if you are late with your taxes.
What Will the EDD Investigate During the Audit?
When the EDD performs an audit, you can expect it to be thorough. The department will interview you and examine your records to learn about your company and confirm that you classified your workers correctly.
How the EDD distinguishes “employees” from “independent contractors” depends on several factors, such as your business relationship with the associate and whether that person runs their own company. The EDD may also investigate how you reported gross and taxable wages and whether you followed the law regarding withholding and reporting personal income tax for wages.
What Can Happen If I Have Not Classified Workers Correctly?
Now that you know the connection between EDD audits and worker classification, you may wonder what can happen if you misclassify workers. This can lead to significant financial liabilities and employers can even face jail time in extreme cases.
Therefore, ensuring correct classification is more than just a bureaucratic formality; it is a legal requirement, and getting it wrong carries financial and reputational consequences.
How Can I Prevent This From Happening?
You can reduce the risk of misclassification by keeping up with current law and guidance on worker classification. Consulting with an experienced payroll tax attorney can help you align your business practices with state requirements. In addition, implement checks and balances in your hiring processes to review classifications regularly while maintaining precise records.
By taking worker classification seriously, you should be able to avoid expensive errors that can threaten your business’s long-term success. If the EDD is performing a tax audit on your business, Pershing Square Law Firm can help. Our experienced EDD tax attorneys can help you negotiate the repayment with the EDD and teach you how to prevent costly audits to your company in the future.
Checking Your Own Arrangements
Classification is the most common trigger for an EDD audit. Our overview of California classification laws covers the ABC Test in full, and working with contractors and audit risk covers the exposure.
