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How to Get Audited by EDD

No one WANTS to get audited – and certainly no one is looking for advice on how to trigger an audit by EDD.  So why is this blog called How to Get Audited by EDD?  Because the surest way to get audited is to make the mistakes covered in the video on this page.  So, avoid these red flags so you don’t get audited by CA EDD.  

Let’s outline the three key triggers that could prompt an audit and some essential tips to minimize your business’ risk of an EDD Audit.

Trigger 1: Misclassification of Workers

One common trigger for an EDD audit is the misclassification of workers, particularly the excessive use of independent contractors without corresponding employee records. If your business relies heavily on independent contractors and lacks W-2 forms for employees, it may raise red flags with the EDD. To address this issue:

Ensure proper classification: Evaluate the status of your workers and ensure they are correctly classified as either employees or independent contractors based on legal guidelines.

Document officer compensation: For corporate officers, accurately report wages on federal income tax returns and maintain records of reasonable compensation based on industry standards.

Trigger 2: Inconsistent Reporting

Inconsistent reporting of worker classifications, such as filing both W-2 and 1099 forms for the same individual or switching between classifications over time, can trigger scrutiny from the EDD. To avoid potential issues:

Maintain consistency: Adopt a consistent approach to worker classification and reporting to avoid discrepancies that could lead to audits.

Stay informed on regulations: Stay updated on relevant laws and regulations, such as AB5 in California, to ensure compliance with evolving standards.

Trigger 3: Lack of Documentation

Insufficient documentation to support worker classifications and compensation practices can complicate EDD audits. To strengthen your position:

Document decisions: Keep detailed records of worker classifications, compensation decisions, and any justifications for classification choices.

Consult with professionals: Seek guidance from qualified professionals, such as CPAs or tax attorneys, to review your practices and address any compliance concerns.

By proactively addressing these triggers and implementing sound practices, you can reduce the risk of an EDD audit and demonstrate compliance with applicable laws and regulations. Remember, preparation is key to navigating audits successfully.

In conclusion, facing an EDD audit can be daunting, but with the right approach and expertise, you can navigate the process confidently. For personalized guidance and support, consult with John Milikowsky and the team at Milikowsky Tax Law. Stay informed, stay compliant, and safeguard your business against potential audit risks in 2024 and beyond.

Facing an EDD Audit? Our Southern California Tax Attorneys Are Here to Help.

if your business is undergoing an EDD audit, our tax attorneys can provide expert guidance in dealing with the Employment Development Department. 
To learn what to expect in a California EDD audit, read our article, here.