If you’re a business based in California, you’ve likely had dealings with the Employment Development Department (EDD).
It is the responsibility of the EDD to collect payroll taxes and it conducts payroll tax audits of companies and businesses. In addition, the EDD conducts what’s called Unemployment Insurance (UI) benefit audits. The federal-state unemployment insurance system (UI) helps people who have lost their jobs by giving them temporary wage replacement. The EDD conducts what are known as benefit audits to protect the UI program.
Who Receives an EDD Employee Benefit Audit?
The employer receives a notice to provide additional information from EDD. Upon receipt the employer is asked to provide specific information about the employee or 1099 worker in question’s earnings during a specific period. A SSN check is also requested at that time. The employer’s records are then checked against the Unemployment Insurance recipient’s claim to verify whether or not that person is eligible for Unemployment Insurance checks.
EDD audits also aid in lowering employee Unemployment Insurance costs. New employees are assigned a 3.4% UI rate for two to three years of employment and then that rate fluctuates after that set time depending on the contribution to UI benefits. EDD can take from 1.5% to 6.2%, but the taxable wage limit caps at $7,000 per calendar year.
EDD benefit audits are conducted often- on a daily, monthly and quarterly basis to ensure that Unemployment Insurance (UI) is distributed to eligible claimants only. They are done through matching information provided by employers against information provided by individuals who have filed a UI claim. According to EDD, there are four types of benefit audits:
New Employee Registry Benefit Audit
This is based on information provided by California employers to determine if an individual received UI benefits after returning to work and failed to report their work and earnings. This is used for daily audits.
National Directory of New Hires
This is based on information provided by employers nationwide to determine if a claimant received UI benefits after returning to work and failed to report their work and earnings. This is used for the weekly audits.
Quarterly Wage Earnings
This is based on earnings reported by employers to the EDD to determine if a claimant received benefits while working and failed to report their work and earnings. This is used for the quarterly audits.
EDD cross-matches wages earned in other states to determine if a claimant received benefits while working in another state. This is also done on a quarterly basis.
If the EDD determines that an individual received benefits they should not have received, or if they were overpaid, they will be assessed that amount along with any applicable penalties.
What if the Benefit Audit was started by a gig worker (or 1099 contract worker)?
The reason an EDD benefit audit is dangerous is that if a former worker has applied for UI benefits and that person was hired as a 1099 for your company, EDD will open a misclassification audit to review whether you correctly or incorrectly classified that person as a 1099 worker. Those workers hired as 1099s should know that they are ineligible to receive Unemployment Insurance at the end of a gig with an employer. As a legitimate 1099 worker, they have their own business, set their own hours and have other clients. As an employer they are paid on form 1099 and therefore no worker’s compensation insurance is taken out of their checks, no taxes are withheld and no payroll taxes are paid by the employer. Therefore, a legitimate 1099 worker would not file for unemployment.
What to Do If You Receive a Benefit Audit
EDD will instruct you to complete the audit form and respond within 10 days of receiving the notice. Completing the audit form helps the EDD determine if the correct payments were made to the claimant. If incorrect payments were made, a credit can be given to an employer’s account.
See the blank sample example below:
To assure your company is not being harmed or assigned penalties, make sure to complete the audit form as accurately and completely as possible. Incorrect filing of benefits is one of many issues that can come up in an EDD audit.
If you are already part of an EDD benefit audit, and it becomes clear that you have incorrectly classified your employees, a misclassification audit will commence on top of the benefits audit. This opens you up to more fines and penalties.
To assure your company is not being harmed or is assessed penalties, make sure to complete the audit form as accurately and completely as possible. EDD benefit audits may seem simple but they can lead to much more complex issues.
Read more about EDD Misclassification Audits here: