The Employment Development Department conducts audits to make sure that businesses pay payroll taxes and employees receive the benefit coverage they are entitled. It comes down to if you classified your workers properly or not.
An audit will be conducted if there is any suspicion that your company could be incorrectly labeling working or paying taxes. The red flags typically come up when someone listed as an independent contractor tries to claim unemployment benefits.
EDD Audit Penalties
Consequences of an underpayment or misclassification will depend on if any discrepancies occurred intentionally or unintentionally.
| Classification | Penalties |
| Unintentional Misclassification | $50 penalty for each W-2 form not filed for contractor employees.Penalties of 1.5% of employees wages to compensate for:Income tax withholding40% of employee payroll taxes100% of matching employer payroll taxesPLUS interest on each of these penaltiesFailure to Pay Taxes penalty of 0.5% of unpaid tax liability for each month delinquent. |
| Intentional Misclassification | Penalties from above20% of all wages paid and 100% of payroll taxes that employer and employee share-alike.Criminal penalties including:$1000 fine per misclassified workerUp to one year in prisonEmployers can see total fines of up to $25,000 per misclassification violation |
The EDD is the largest tax collection agency in the state of California. An individual by law is presumed to be an employee unless the employer/business owner is able to prove the contrary. It is important to understand what you are facing before and during an EDD audit. Reverent Employer Consultants are ready to help you through any challenges.
