What Triggers an EDD Audit?

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Failure to properly classify your workers in the accurate groups can face penalties such as back wages, taxes, and interest due. You could be subject to the Employment Development Department audit, in which 10-30% of audited employers are found to have misclassified their employees. 

Reverent Employer Consultants will help your business identify audit triggers in advance in order to maintain the proper categorization of the workforce. Some instances that may trigger an EDD audit are improperly categorized as independent contractors. Companies that utilize both W-2 employees and 1099 independent contractors need to classify them correctly for tax purposes.

The IRS will take notice if an employee has been classified as a 1099 independent contractor but the employee files a claim for unemployment, workers’ compensation, or disability. An audit will be triggered if someone receives both a W-2 and 1099 in the same year.

Reverent Employer Consultants will review the persons and entities with whom you work, and assist your business in properly categorizing them. We will also guide you in selecting a reputable payroll company to minimize the risk of EDD benefits, tax issues, and audits. 

Audit Triggers Process

Once an audit trigger has been initiated, an auditor will perform an interview to go over the entire process. They will gather basic information and answer any questions that you may have. Employer’s records will be reviewed by the auditor and it can span the 12 most recently completed financial quarters.

The most commonly audited records include:

  • Check registers
  • Bank statements
  • General ledgers/journals
  • Annual financial statements
  • Ownership verification
  • Tax returns
  • Payroll records
  • Employment tax records

Once the audit has been completed, you will be informed of one of four results.

  1. No differences have been found.
  2. An overpayment has been made~credit or refund issued to you.
  3. Underpayment has been made~assessment due from you.
  4. Both overpayments and underpayments have been made.

The IRS may also be provided with this information. Reverent Employer Consultants will work with you to best educate your employees on how to communicate with your payroll company and accountant, in order to best protect your business. Call Reverent today to avoid these issues ahead of time.

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