Is Your Digital Marketing Agency Facing an EDD Audit?
Digital marketing agencies are just one of the many businesses facing the prospect of an EDD audits. If you’re a San Francisco internet marketing company and you’ve ever hired an independent contractor, you may want to familiarize your practice with the EDD audit. These California Employment Development Department (EDD) 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.
As a tax attorney who has represented clients through the EDD audit process, I’ve worked with several digital marketing agencies who ask me about the audit process. Here’s a brief outline of the EDD audit process and how it begins.
Are EDD audits random?
EDD audits are typically not conducted at random. The initiation of these audits often stems from an independent contractor applying for unemployment benefits. Since independent contractors aren’t eligible for these benefits, their application prompts the EDD to investigate the company’s practices. For businesses, including those in the construction sector, adherence to the California ABC Test is crucial for correctly classifying an individual as a 1099 independent contractor instead of an employee. This test requires affirmative answers to all three of the following criteria for an independent contractor classification:
- The worker operates independently from the control and guidance of the employer in the execution of the work, both in terms of the contract and in actual practice.
- The worker’s tasks are outside the normal operations of the employer’s business.
- The worker routinely engages in a trade, occupation, or business of the same nature as that involved in the work performed.
To assess the likelihood of an EDD audit for your construction business, it’s advisable to evaluate these criteria. If you’re unable to confirm all three criteria for an individual you’ve classified as an independent contractor (and not an employee), your business might be at risk of an EDD audit.
Navigating EDD audits can be challenging, particularly when they involve past employees or independent contractors, and the triggers for these audits are unclear. It’s not recommended to handle EDD matters alone. The most effective way to safeguard your construction business is to consult with a tax attorney experienced in dealing with 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.