What Happens During a Payroll Tax Audit in California?

All California business owners are susceptible to payroll tax audits. Learn what to expect by understanding what happens during a payroll tax audit in California. This guide offers valuable information!

Common EDD Triggers

All employers must file and pay payroll taxes. This requirement leaves all California businesses vulnerable to EDD audits. The department cracks down on employers who aren’t paying accurate amounts of payroll taxes (especially for their independent contractors).

If the EDD suspects you’re misclassifying employees to avoid paying payroll taxes, they will audit your business. However, filing late taxes, document errors, and payroll delays can trigger audits. Former workers applying for unemployment insurance can also trigger the EDD.

Although various things can tip off the EDD, random audits do occur. You should have nothing to worry about as long as you follow good practices!

The Audit Processes

The main occurrence during a payroll tax audit in California is the EDD collecting documents from business owners. They also put the business under a series of tests; both occurrences review payroll records and tax documentation. An EDD auditor will contact the employer and request paperwork. The auditor will also select a random employee and review their W2 for the tax year on file.

As an employer, it’s important to have the right information on hand. Don’t volunteer additional documents (as the EDD can use the information against you). Keep in mind that given the close examination of payroll information, audits can take a long time.

Verification and Accounting Tests

As previously mentioned, the EDD auditor will put your business through a series of tests, including a payroll verification test where the EDD compares the business records to their records. This ensures the payroll journal matches the one on file with the EDD. An internal accounting test assesses if you need to reclassify payments into taxable wages. The auditor will assign the test and tell you what information to provide.

Helpful Advice: Pre-Audit Your Business

Payroll audits catch discrepancies and may lead to repayments (or penalties from the EDD). Before the official audit, you can “pre-audit” your business and catch inaccurate records and information before the EDD reviews information. When problems arise, inaccuracies won’t surprise you. Additionally, you can think of solutions to correct issues.

Let Us Help You

As experienced EDD lawyers in California, we have the expertise to help you deal with