Being a California business owner comes with its share of challenges. One of the last things any business owner or entrepreneur wants to deal with is an audit from the Employment Development Department (EDD). That being said, if you’re a California business owner and taxpayer — and if you’ve ever hired an independent contractor — then you should be familiar with an EDD audit. Many business owners, especially those in San Francisco, ask how the EDD is even familiar with the daily workings of California small businesses and know how to begin the audit process. Here are five steps your business can take to help prevent an EDD audit.
1. Classify Workers Correctly — Properly classifying workers as either employees or independent contractors is crucial. Generally, employees are subject to more direct control and direction by the employer, while independent contractors are free from the control and direction of the hirer in relation to the performance of the work. Review your worker classifications regularly and speak with an experienced tax attorney if you’re uncertain about the correct classification.
2. Maintain Accurate Records — Keeping thorough employee and contractor records is another way to possibly prevent an EDD audit. You want to keep clear and detailed records of payroll information, including wages, hours worked and benefits provided. This documentation can help substantiate your compliance with labor laws and regulations. Additionally, keep all relevant business records organized, such as contracts, invoices, and communications with workers.
3. Pay Payroll Taxes on Time — Timely payment of payroll taxes is not only a legal obligation, but also can be a factor that affects your chances of being audited by the EDD. Failure to pay payroll taxes can raise a red flag and draw attention to your business. Work with an experienced tax attorney or business lawyer to set up a reliable system to ensure you meet all payroll tax deadlines.
4. Implement Internal Procedures — Strong internal controls are essential to prevent errors and inconsistencies that may trigger an EDD audit. Regularly review your financial statements and reports to catch any discrepancies early and rectify them promptly.
5. Seek Professional Guidance — Labor laws and tax regulations can change frequently, which is why it’s crucial to stay informed about updates that may affect your business. Keep up to date with changes in employment and tax laws that may impact your employees and independent contractors. And don’t hesitate working with an experienced San Francisco tax attorney who can make sure your business is doing everything possible to prevent an EDD audit.
EDD audits can be confusing, especially when you’re not sure what triggers the process. The best thing you can do to protect your business and prevent a possible audit is to speak to a San Francisco tax attorney with experience in EDD audits.
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
