If you’re a business owner in California, you may have heard the term EDD audit or even received a notice that your business is on the receiving end of an audit. While an EDD audit is stressful, your business can survive the process, and you can also take steps to avoid one in the future. Let’s look at an EDD audit and what your business needs to do to get through it.

An EDD audit occurs when the California Employment Development Department (EDD) launches an investigation into a business’ California state payroll tax records to determine if the business has classified a worker as an independent contractor instead of an employee.

So many businesses hire independent contractors – or freelancers – for work projects they want to outsource. Business owners sometimes believe this is less expensive than hiring an employee and paying them a salary and benefits. They believe it allows the business to temporarily employ a person with specialized skills.

However, due to the significant changes in the law, many taxpayers can be found liable and business owners can be held personally liable for payroll taxes of workers they consider to be independent contractors. This happens when the EDD determines, through the audit process, they believe these workers are actually employees.

So if you’ve ever hired an independent contractor, you could be facing this potential tax liability. And if you don’t know how to protect yourself and your business, you could be facing a substantial financial burden.

If your business is facing an EDD audit, here are a few steps to keep in mind in order to successfully survive it.

  1. Contact a tax attorney, preferably one who has experience with EDD audits. The attorney will advise you to gather your records and relevant documents in order to help prepare your defense.
  2. Make sure you have documentation that includes employment questionnaires, payroll records, federal income tax returns, bank statements, wage information for the audit period, and employee registers. The more documentation you are able to present in your defense, the easier it will be to get you through the audit process successfully.
  3. Respond to the Inquiry Regarding Records notice from the EDD, as well as the Preaudit Questionnaire, in a timely manner. Your tax attorney should help you complete these and submit them by the deadline.
  4. Talk to your tax attorney about any tax liabilities you may be facing as a result of the EDD audit. These tax liabilities may include a percentage of unpaid taxes, set dollar amounts for each case of unreported employees or independent contractors, and much more. A tax attorney may be able to help you review the audit work papers and assist in reducing the assessment.
  5. 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.

Receiving a California payroll tax audit can be confusing and scary. Knowing what to expect and working with a tax attorney will help assure your business will survive the EDD audit process.

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.