What Triggers an EDD Audit?

EDD Audit Triggers

• Independent contractor filed for unemployment
• A disgruntled worker (1099 or W2) reported your company to EDD
• EDD “randomly” selects your company based on a computer algorithm – one factor is the larger % of independent contractors versus employees compared to your company revenue i.e. Company with $2 million in revenue with few or no employees

Minimize risk of EDD audit

Do you hire 1099 contractors? If you are unsure if your workers are properly classified as contractors versus employees, review these questions and the facts to determine if your contractors are misclassified:

• Does each contractor have an independent business
  • EIN, business entity, business license, website, a client base?  For instance, in construction workers hired by a construction company must have a valid contractor’s license with your State’s Contractor’s Licensing Board.
• Examine the scope of work each worker performs and compare that to the services your company performs?
• Do you control your worker?  Control comes in various forms: 
  • requiring workers to report to work at specific times
  • reviewing your contractor’s work 
  • requiring workers to report to you.
  • Requiring workers to wear a name badge or use your company’s business cards
  • An Independent contractor means the worker is working “independent” of your company.
  • How often are your workers paid?
  • Do you have a valid contract with each worker?

You may want to hire a tax attorney to review your facts, records, and your state’s laws to ensure you are in compliance.  

For instance, on January 1, 2020, California enacted a law called AB5 that changed the requirements for companies hiring independent contractors.