Did Your Production Company Receive an EDD Audit Notice?
If you run a production company and recently received a notice of audit from the California Employment Development Department (EDD), you’re not alone! I’ve received several inquiries from production companies facing an EDD audit. These state payroll audits occur when a business has classified a worker as an independent contractor instead of an employee. This means the business owner can be liable for “unpaid” payroll taxes because the EDD has determined that they believe these workers are actually employees.
Many production company executives ask how the EDD is even familiar with the daily workings of their business. Here’s a look at how the EDD starts the audit process and what you can expect.
The EDD typically does not randomly select businesses to audit because the process itself starts with a contractor filing for unemployment. Independent contractors are not eligible for unemployment benefits; so their claim triggers the EDD to look into the business practice.
Businesses, including production companies, must follow the California ABC Test to classify an individual as a 1099 independent contractor rather than an employee. The ABC Test states that all three of the following questions must have a “yes” answer in order to classify an individual as an independent contractor:
- The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;
- The worker performs work that is outside of the usual course of the hirer’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the hirer.
If you want to determine whether there is a trigger for the EDD to audit your production company, a good process is to answer these questions. If you cannot answer “yes” to all three of these questions – and you’ve classified the individual as an independent contractor and not an employee – chances are you may face an EDD audit in the foreseeable future.
Additionally, the EDD will look for things such as whether you asked the contractor to work certain days and times if you have signed contractors if you required them to attend company meetings or training, or if you did not want them working for other companies.
Depending on the reason for your EDD audit, you could be liable to face a wide range of fines that can cause you a considerable amount of financial strain. These sorts of fines include a percentage of unpaid taxes, set dollar amounts for each case of unreported employees or independent contractors, and much more. However, if you don’t agree with the proposed assessment the EDD gives you after their audit is complete, your tax attorney can help you appeal the assessment.
EDD audits can be confusing, especially when they involve a former employee or independent contractor and you’re not sure what triggers the process. Don’t try to work with the EDD yourself. The best thing you can do to protect your production company is to speak to a tax attorney with experience in EDD audits.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
