Tag Archive for: California EDD

California CPAs should ask their clients who hire 1099s if they have a contractual agreement, invoices, licenses, insurance, and an EIN.

Certified Public Accountants (CPAs) have the most insight into their business owner clients’ daily transactional history. You may find that your clients who have 1099 contractors are now in the grey area of worker classification since it was redefined by AB-5 in January 2020.  

Under the new bill, all workers are automatically classified as W-2 employees unless they meet all three of the following criteria

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact
  2. The worker performs work that is outside the usual course of the hiring entity’s business
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

We frequently see cases of inadvertent contractor misclassification that are flagged by The Employment Development Department (EDD). EDD audits are most commonly triggered by: 

  • Independent contractors filing for unemployment benefits 
  • Employee complaints 
  • Late tax filings 
  • Random verification audits 

If the agency finds any misclassified workers during the audit, it results in fines, fees, and penalties that can be damagingly high if left unaddressed. 

Keeping this in mind, here are questions you can ask your clients to ensure that their 1099s are correctly classified, and help your clients reduce the risk of an EDD Misclassification Audit: 

  • Do your 1099s do similar jobs to your W-2s?
  • Do you have a contractor agreement with all of your 1099s?
  • Do your contractors Invoice you?
  • Does your contractor have a license?
  • Do they have insurance? 
  • Do they have an EIN?

Here’s an overview of how each question can provide more insight for your clients. 

Do Your 1099s do Similar Jobs to Your W-2s?

1099 independent contractors who perform similar jobs as W-2 employees may be considered an employee during an audit unless there is a clear distinction between the two. Make sure there are clear distinctions between the two. The W-2 employee works regulated hours, has specific job functions, is provided work equipment, and is told when and how to perform their job duties. They also receive employee benefits and do not have a clear end date for the work performed. 

On the other hand, 1099 independent contractors have flexible working hours, flexible job requirements as dictated through the contract, must provide their own working equipment, can work for multiple employers at the same time, and are not directly managed on job functions. They do not receive employee benefits and have a clearer job end-date. 

For example, one of your business owner clients may have a marketing coordinator who is classified as an employee. Your client may want to hire a marketing agency for a website redesign as a 1099 independent contractor. While both the marketing coordinator and the marketing agency perform job functions under the marketing umbrella, their job functions and classifications are different. 

The coordinator develops and executes the client’s marketing strategy specifically for your client’s company for as long as they work in that specific role. The hired marketing agency will perform the website redesign for your client until the project is complete. Once finished, the partnership is completed. While the marketing agency is working on your client’s website redesign, they can simultaneously work for other companies. 

Do You Have a Contractor Agreement With all of Your 1099s?

The independent contractor agreement outlines specific details for the job the independent contractor will perform. It is the working arrangement between the client and the contractor that typically includes:

  • A description of the job or service provided by the contractor
  • Payment details (this can include information about retainers, deposits and billing) 
  • The length and term of the project or service 

Do Your Contractors Invoice You?

Invoices help keep records of payments, type of work performed, and hours worked. Having organized records of invoices between the contractor and the client helps EDD verify that the independent contractor is indeed an independent contractor. 

Clients who put 1099s on scheduled payroll put themselves at risk for a misclassification audit. W-2 workers should be placed on payroll, not 1099s. 

Does Your Contractor Have a License?

Some workers (such as healthcare professionals and construction workers) are required to provide proper licenses to work. Failing to hire workers with proper licensure can open your client’s business to hefty fines and penalties from EDD. 

If your client hires contractors who don’t have licenses do they have: 

  • A website?
  • A social media presence? 
  • A marketing budget?

These are all important factors to consider. 

Do They Have Insurance? 

Independent contractors provide their own insurance to cover liability, worker’s compensation, or other risks to help them protect their business. If your client is insuring their independent contractors, this is a sign they may actually be W-2 employees. 

Do They Have an EIN?

An EIN is an Employer Identification Number. This is a unique tax identification number for businesses in the United States to pay state and federal taxes. Asking independent contractors without an EIN to provide one is a simple way to further ensure they are 1099s.

All of these factors add up to a robust defense against a misclassification audit by EDD. By fixing any misclassification errors ahead of time, CPAs can save their business owner clients the hefty fines and penalties associated with EDD audit findings. Want to learn more about the EDD audit process? 

Read our article on what to expect in an EDD audit here. 

 

California CPA's should ask their clients the right questions to help them avoid triggering an EDD audit

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California Assembly Bill 5 (AB-5) took effect on January 1, 2020, and is the new standard by which employers must classify employees. Small business owners (SBOs) should familiarize themselves with AB-5 and the ABC test to avoid employee misclassification and potential penalties from the Internal Revenue Service (IRS).

What is Assembly Bill 5 (AB-5)?

Assembly Bill 5, commonly referred to as AB-5, is a piece of legislation that extends employee classification status to some independent contractors, requiring that hiring entities reclassify these workers as employees based on the strict criteria outlined in the ABC Test.

What Caused Assembly Bill 5?

Assembly Bill 5 was inspired by the April 2018 Dynamex Case—when Dynamex reclassified all employees (previously classified as W-2s with all the associated perks) as independent contractors to save employee costs– before being signed into law by Governor Gavin Newsom in September 2019.

Read on to learn how Dynamex ruined it for everyone.

What Businesses Does AB-5 Affect?

AB-5 affects all small businesses and small business owners. Most prominently, AB-5 impacts SBOs who hire 1099 independent contractors and their operations in California.

How Does AB-5 Affect Businesses?

Through AB-5, the California Employment Development Department (EDD) places the burden of proof on businesses to show that workers are correctly classified as 1099 contractors.

The misclassification of employees can lead to:

  • High fines
  • Penalties
  • And back tax payments

How Do I Correctly Classify 1099 Independent Contractors?

AB-5 introduced the ABC test as a stricter guideline to determine how to classify a worker as a 1099 independent contractor. 

What is ABC Test?

Check out our video below for an in-depth explanation of the ABC Test.

The ABC test is a set of requirements that the worker must meet to be classified as a 1099 independent contractor instead of a W-2 employee. The worker must meet all three criteria of the ABC test to be correctly classified as an independent contractor:

  1. The worker is free from the control and direction of the hiring entity in connection to the performance of the work.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the contractor fails to meet any of the criteria in the ABC test, they are automatically classified as a W-2 employee instead.  

How To Meet The ABC Test Criteria 

When classifying your 1099 independent contractors according to the ABC Test, gather the following information to make sure they are classified correctly.

The First Criteria

  • Gather information on project deliverables and how they are delivered.
  • Have your contractor submit an invoice.
  • Keep correspondence about project timelines recorded in a clear and accurate manner.
  • Ensure you’re not placing requirements on your 1099 contractors regarding how they perform their work. For instance, do not tell the workers what to do or specify reporting requirements. 
  • Document and file scope of work (SOW) from your contractor.

The Second Criteria

  • Compose a definition of your contractors’ line of work.
  • Compose your definition of your business’s line of work (i.e. what products or services does your company provide?)

The Third Criteria

  • Verify if your 1099 has insurance.
  • Ask if they have a legal entity.
  • Check if they have associations, unions, or other affiliations.
  • Review their professional certifications.
  • Gather their business card, website, and a list of other clients the contractor has worked for.

What is the Borello Test?

Before AB-5 was signed into law, the Borello test was used to determine if an employee should be classified as a 1099 independent contractor or a W-2 employee. The Borello test was established by the Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989). The test relies on 13 factors to determine employee classification.

Even with new AB-5 regulations, the Borello test can still be a useful resource to help classify employees.

EDD provides the full Borello test worksheet with the following questions to help guide classification:

  1. Do you instruct or supervise the person while he or she is working?
  2. Can the worker quit or be discharged (fired) at any time?
  3. Is the work being performed part of your regular business?
  4. Does the worker have a separately established business?
  5. Is the worker free to make business decisions that affect his or her ability to profit from the work?
  6. Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
  7. Do you have employees who do the same type of work?
  8. Do you furnish the tools, equipment, or supplies used to perform the work?
  9. Is the work considered unskilled or semi-skilled labor?
  10. Do you provide training for the worker?
  11. Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
  12. Did the worker previously perform the same or similar services for you as an employee?
  13. Does the worker believe that he or she is an employee?

Answering “yes” to questions 1-3 would provide a strong indication that the worker is an employee. Answering “no” to questions 4-6 would indicate that a worker is not in business for themselves and would likely classify as an employee. Questions 7-13 indicate important factors to be considered.

While answering “yes” to any one of the questions may indicate that a worker should be classified as an employee, no single factor is enough to determine classification independently.

The full worksheet provided by EDD provides further clarification on certain factors and circumstances.

If completing the provided worksheet does not provide sufficient clarification for employers, EDD also offers the ability to request a written ruling by completing a seven-page form called Determination of Employment Work Status. The form supports any business entity looking to determine if a worker is an employee or an independent contractor.

How Do I Avoid Misclassification?

You can avoid misclassification by carefully analyzing the arrangement you have with your worker in relation to the guidelines described in the ABC test and regulations set forth by AB-5.

To learn more, read on about how to hire an independent contractor.

Small business owner responds to EDD audit

Now that the April filing deadline has passed, small business owners may be asking: what’s next?

As tempting as it may be to put off thinking of taxes until next year, some small business owners may be required to respond to an California’s Employment Development Department (EDD) audit.

Read on how to learn common EDD audit triggers and and how to respond.

What is a CA EDD Audit?

EDD conducts an audit to determine if the employer has paid the full and correct amount of taxes due under California law.

What Triggers EDD Audits?

The following circumstances most commonly trigger EDD audits:

  • An independent contractor filing for unemployment
  • The EDD verification process
  • Late filing of tax returns or late payment of taxes
  • Failing to pay wages on time or collect SDI and PIT

Many verification EDD audits are conducted on a random basis. These audits are not based on any assumptions of inaccurate or incomplete information. Additionally, EDD has the power to audit a company if they believe the business has purposefully misclassified workers in an attempt to avoid paying payroll taxes.

However, many legitimate businesses are unintentionally misclassifying employees. Many of these misclassifications are a as a result of new, strict worker classification regulations, related to Assembly Bill 5 (AB-5).

What is AB-5?

AB-5 is a piece of legislation that extends employee classification status to some independent contractors and gig workers depending on the qualifications outlined in the ABC test. AB-5 went into effect on January 1st, 2020, and changed how Small Business Owners (SBOs) who hire independent contractors operate in California.

Learn more about how this law came into effect, and how Dyanmex ruined it for everyone, here. 

How Can AB-5 Lead to the Misclassification of Employees?

AB-5 introduced the ABC test as a stricter guideline to determine how to classify workers as 1099 independent contractors. A worker must meet all three criteria of the ABC test to be classified as a 1099 independent contractor instead of a W-2 employee. The worker must:

  1. Be free from the control and direction of the hiring entity in connection to the performance of the work.
  2. Perform work that is outside the usual course of the hiring entity’s business.
  3. Be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the contractor misses one of the criteria in the ABC test, they should be classified as a W-2 employee.

Learn more about AB-5 and the ABC test, here.

What Happens If I Misclassify an Employee?

Employee misclassification can lead to several unfortunate outcomes, including fines and penalties.

With the new regulations, employee misclassification is more common for small businesses. As an example, let’s examine the case study of one of our clients, Ryan Brown, who misclassified his workers and was faced with EDD audit.

Check out the video below!

Meet the Client: Ryan Brown

Ryan Brown owns a construction company in Oceanside, California. His business classified a portion of the staff as 1099 independent contractors and the rest as W-2 employees.

How Can the Misclassification of W-2 Employees Happen?

The services of the hired independent contractor must be consistent with all three of the criteria established by the ABC test or they are automatically classified as a W-2 employee.

In Brown’s case, he didn’t realize that the independent contractors were providing the same services as the W-2 employees. Therefore, the employees he classified as independent contractors didn’t meet the second requirement, “[workers] perform work that is outside of the usual course of the hiring entity’s business.” Thus, all staff members should be classified as W-2 employees–any worker the business claimed was an independent contractor was misclassified.

What Triggered Brown’s EDD Audit?

EDD conducted a random site sweep of Brown’s business. This sweep resulted in EDD finding misclassified workers.

What Happened When Brown Contacted Milikowsky Tax Law?

Brown called Milikowsky Tax Law and set an initial meeting. Before signing any kind of retainer, John started making calls to learn more about the audit and what steps they needed to take immediately to protect the business and provide accurate information to EDD and CSLB.

What Were the Results of Brown’s EDD Audit?

After less than a month, EDD sent a final letter indicating the decision– minor fines were due, the case was closed. For Brown, the results–and knowing his business was going to be fine– provided a sense of relief.

Ryan’s results are both exceptional and the kind of outcome our team strives for with every client. And while we can’t promise any client’s outcome will be the same as another, we can say with utmost assurance that the team at Milikowsky Tax Law is your relentless advocate in the face of EDD, CSLB, and IRS audit.

Make sure you provide the list of employees, by wage category, including their wages and their job description with the corresponding code description.

We partnered with benchmark commercial insurance to discuss how audits relate to workers’ compensation. Benchmark offers a boutique approach to serving their clients through providing and maintaining commercial and personal insurance policies. Their goal is to establish comprehensive risk management and accident-avoidance programs to help prevent claims from arising. Get to know benchmark here

Watch our full video on how audits and workers’ compensation relate to one other in our video below.

 

 

How do Audits Relate to Workers’ Compensation?

Under a workers’ compensation policy, a policyholder is required to verify with the workers’ compensation carrier the actual wages that were paid to W-2 employees. In cases of hiring 1099 independent contractors, if they do not have workers’ compensation, the policyholder must verify the policy term. 

Most often, the audits triggered by workers’ compensation issues are referred to as wage verification protocol. The most important thing to remember about wage verification protocol when it comes to a workers’ compensation carrier, is making sure that you are providing the list of employees, by wage category, including their wages and their job description. In the provided list, make sure that each job description matches the code description in which you have them classified. 

During the process, your attorney should be reviewing the schedule with you before submitting the verification to the agent (auditor). Reviewing the schedule helps avoid having to reclassify wages in a higher-rated code post wage verification protocol. 

 

What is the wage verification protocol?

When the Employment Development Department (EDD) notifies business owners of the verification protocol, they send a letter in the mail. When business owners partner with our Milikowsky Tax Law team, we research the hired independent contractors that meet the criteria to be correctly classified as 1099 workers. In this process, we find:

  • Business reports 
  • Background reports 
  • Verify EAM and DBA
  • Business license 
  • EIN number
  • Social media accounts 
  • Website, if they have one (sometimes freelancers use Fiverr or Yelp pages instead)

Sometimes, during the verification process, EDD will notify business owners that workers were misclassified as independent contractors and should actually be classified as full-time W-2 employees. All of the information we gather on each individual worker helps build a case with EDD that the hired 1099 independent contractor is properly classified as such. 

The writeup we create for each worker is included in our initial response to EDD. When the auditor receives it, they don’t have to pursue the same research we already completed. While they will still need to verify our findings, the auditor will not have to develop their own theory about classification because we’ve already given them the story and the answer. This process is easier for the auditor to see versus when they are given information without a story behind it. 

There are tips and tricks to help business owners avoid feeling blindsided through the audit process either by EDD, CSLB, or by their workers’ compensation carrier. We’re here to help before business owners ever get to that process. Learn more about What to Expect in an EDD Audit here.

 

We partnered with benchmark commercial insurance to discuss how audits relate to workers’ compensation.

Working Men smiling

When The California Employment Development Department, EDD did a site sweep, Ryan Brown found himself facing an audit.  As he did research on his own as to what the ramifications of an EDD audit might be, he saw steep fines, jail time and high conviction rates reported time and time again.

Ryan was afraid he would lose his business.

Ryan called Milikowsky Tax Law and set an initial meeting.  Before we signed any kind of retainer, John started making calls to learn more about the audit and what steps they needed to take immediately to protect the business and provide accurate information to EDD and CSLB.

” I felt so much better coming out of the office that day.  John just starting helping me immediately”.

John and the Milikowsky Tax Law team got to work communicating with the EDD and CSLB agencies, clarifying the circumstances of Ryan’s unique situation and providing the documents the agencies asked for in a way that helped them understand his business.

After less than a month, EDD sent a final letter indicating that while minor fines were due, the case was closed.  For Ryan, the results were life-changing.  To go from the fear of losing everything to knowing his business was going to be fine was a tremendous sense of relief.

Ryan’s results are both exceptional and the kind of outcome our team strives for with every client.  And while we can’t promise any client’s outcome will be the same as another, we can say with utmost assurance, the team at Milikowsky Tax Law is your relentless advocate in the face of EDD, CSLB and IRS audit.

When you review your contractors, ensure that all of your workers are correctly classified by running a Verify1099 report.  The Verify1099 report checks for valid business license, EIN, web presence and professional licensing to build a strong case for defending your classification of certain workers as 1099s. Visit https://verify1099.com to learn more and get started. EDD audits are fast-paced and have serious consequences. Be sure you are classifying your workers correctly.
If your business is currently in an EDD audit, contact the attorneys at MIlikowsky Tax Law immediately.
Symbol of justice

If you have been contacted by California EDD, you don’t have to go through the CA EDD Audit process alone.

Dealing with EDD can be time-consuming, stressful, and expensive (if you owe penalties and back taxes). By working with a skilled EDD audit attorney, you can ensure you are properly represented as you take on this powerful government agency. You will need to determine what type of EDD Audit is being performed. The EDD conducts two different types of audits and knowing how your audit is classified will determine how you prepare. Knowing this will determine the path you need to take. 

1. Verification EDD Audit

These audits are randomly initiated and are not based on your own wrongdoing. Therefore, if you are selected, it does not mean you are in immediate danger. 

2. Request EDD Audit

If you are sent this audit, it is much more serious as this means the EDD has detected something with your business. Typically found by EDD investigators or outsiders-employees or former employees. 

Here are some resources to help you understand what to expect and how to handle your situation.

San Diego EDD Audit Attorney

Proper legal guidance can keep you out of trouble and save you thousands in liabilities. It is in your best interest to retain a dedicated tax law firm with experience handling complicated payroll tax matters.

As experienced San Diego EDD audit attorneys, the team at Milikowsky Tax Law has successfully represented numerous clients in disputes with the Employment Development Department. 

Our firm can handle the following kinds of disputes with EDD:

  • Failure to deposit or file your payroll taxes
  • Liens placed against your business or personal properties
  • Threats to shut down your business
  • Matters that require action or appeal in court
  • Employee and contractor disputes

 Contact Milikowsky Tax Law Today

If you are struggling to resolve California EDD problems while trying to keep your small business running, look no further than our team. At Milikowsky Tax Law, we are committed to protecting our clients’ best interests and providing expert legal counsel. We understand that dealing with any government agency, particularly the EDD, can be daunting. Working with one of our San Diego EDD audit attorneys will provide you the defense you need to protect your business.

Someone looks at a document with a magnifying glass

Being audited by EDD can happen to anyone. It can be challenging to take a step back and see the audit process from an objective point of view, but maintaining your focus is essential to coming out ahead in the end. In this article, we discuss tips to simplify the process, as well as ways to avoid making mistakes throughout the experience. 

Read over the initial audit documents very carefully.

Determine if there is a deadline set by EDD to respond to the initial audit notices. Carefully review the pre-audit questionnaire to determine if there is any information that you believe may hurt you if disclosed. You must be truthful and honest with the information and documentation that you provide to EDD.

If the documentation you received requires you to call and make an appointment, respond immediately. If you need more time to prepare or you wish to seek professional advice, let the appointment secretary know what you want to do. One of the most important things in any audit is timely communication.

Review EDD “Employer’s Bill of Rights.” 

You may obtain a copy of this document by going to EDD web site. It is also known as EDD Form DE195. While most of the “rights” concern the post-assessment process of an EDD assessed deficiency, there is one fundamental right concerning courteous and timely service. 

EDD has interpreted this provision to allow a taxpayer the right to seek independent professional advice. Even if you have a set appointment for your EDD audit, you have a right to postpone this appointment while you seek the advice of one or more professional practitioners. 

Review EDD’s Document Request. 

This document request is Form DE231TA — a standard form included in the initial audit package. EDD may ask for documentation that you are under no obligation to give them, such as IRS tax returns. 

They often ask for documentation that they already have, especially under the category “State Employment Tax Reports.” EDD wants you to provide these documents because it takes them longer to get them internally. 

Documents such as check registers, canceled checks, and bank statements are information and documentation that is irrelevant for many EDD audits.

At the top of the Document Request form, there are dates showing the period of examination; for example, 10/01/2010-09/30/2013. When you assemble your documentation and information, pay particular attention to the audit period. Do not give EDD records before 10/1/2010, or records beyond 9/30/2013. You may open yourself up for a more extensive audit with a potentially larger assessment.

See a professional tax advisor before you meet with EDD, give any documents to EDD, or make any statement that will be used against you. 

A consultation with a professional may mean the difference between audit success and a potential economic disaster. EDD laws are complicated, and they are often issues of tax procedure that you need to know to protect yourself. Make the investment – it is worth it! You can contact the Milikowsky Tax Law office to set up an appointment today.

Man writing on a book

If your business received SBA PPP loan funds here’s what you need to know to prepare for your 2020 taxes.

As with all elements of the forgivable loan, there are steps you should take right now to ensure forgiveness and compliance. In the video below we’ve outlined several scenarios to beware of, as well as suggestions for making the process more efficient and less likely to trigger an audit.

Elements to keep in mind:

  • At least 75% of all PPP funding must be used to cover payroll expenses for your employees.
  • No more than 25% of the loan can be used to cover costs associated with utilities, interest, and other business-related expenses.
  • No expenses paid with PPP loan funds can be deducted from your 2020 tax returns.

If you have questions about complex tax law issues or if you need assistance organizing your application to qualify for the PPP loan, please contact a representative at Milikowsky Tax Law.

über and Lyft car

California Sues Uber and Lyft, Claiming Workers Are Misclassified. In January, 2020 Assembly Bill AB-5 went into effect redefining the criteria for a 1099 contract worker as opposed to a W-2 employee. The bill was aimed at the employers who drive the Gig Economy and in the subsequent months, Uber, Lyft and Door Dash poured 10s of millions of dollars into combatting the law. Last week California’s Attorney General and the Attorneys General of San Francisco and Los Angeles together filed suit against Uber and Lyft claiming that their workers are misclassified and they must pay $2,500 per misclassified worker for their violation of AB-5’s criteria.

To review: AB-5 states that, in order for a worker to be classified as a 1099 contract worker and not an employee, the worker: 1. must be free from time and financial control of the hirer 2. must perform work outside the core function of the hiring entity’s function and 3. must have their own business entity. It appears that the timing of this lawsuit is driven by budgetary concerns as the State of CA has seen apx 4M people file for unemployment during the Coronavirus pandemic.

Lyft responded by saying they would cooperate with the AG and find a solution. Uber responded in a more aggressive way saying they would prefer to take the issue to court. The New York Times article does note that, “Uber and Lyft have reported that they have substantial cash reserves to weather the downturn caused by the pandemic. Uber said it had more than $8 billion, while Lyft said it had more than $2 billion.”. It remains to be seen what will happen with the suit against the largest Gig Economy companies.

For the small business, this serves as a warning that, despite the fact that many people are out of work and may want to seek employment as contract workers as they wait for a new position in their chose career fields, California EDD will not soon be relaxing the stringent criteria for classification as a 1099. Business owners beware: your classifications must be air tight to avoid EDD audit. If you have questions about your worker classification, reach out to the experts at MIlikowsky Tax Law. We have defended employers who have been audited by EDD, accurately conveying their company’s situation to the government and saving money, and time as well as saving businesses from serious financial hardship associated with 1099 reclassification, including fines and back taxes they would have owed if not for our detailed defense.

Tax Audit Survival

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.

Interstate Crossmatch

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:

What is an EDD Benefit Audit

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