EDD can audit your business 12 quarters back from the quarter they pick

Employment Development Department (EDD) performs many services, but their primary role that impacts small businesses is collecting and auditing payroll taxes. Employers pay payroll taxes for W-2 employees, but not for 1099 independent contractors.

a 1099 independent contractor is considered self-employed so they cannot collect unemployment benefits

In short, 1099 independent contractors cannot collect unemployment. They do not qualify because of their self-employment status – meaning their employment status technically never changed because they were never employed by someone.

California CPA's can help their clients reduce an EDD audit risk by asking the right questions

Certified Public Accountants (CPAs) have the most insight into their business owner clients’ daily transactional history. In this role, you may find that your business owner clients have 1099 contractors who are in the grey area of worker classification now that classification was redefined by AB-5 in January 2020.

A got1099 report helps business owners correctly classify workers and employees and avoid government fines and penalties

The California Employment Development Department (EDD) is a government agency that provides unemployment benefits, collects and audits payroll taxes, and maintains California employee records. With the new AB-5 regulations, there are stricter worker classification rules. Now, workers are only classified as independent contractors if they meet all three criteria of the ABC test.

Hire an independent contractor and comply with California law to avoid triggering an EDD Audit

Hire an independent contractor and comply with California law to avoid triggering an Employment Development Department (EDD) audit. Following the steps below does not guarantee that your contractor will still remain a contractor if you are audited by EDD. However, there are ways you can strengthen your position and not have your contractors reclassified as employees.

Dynamex reclassified their W-2s as 1099s, stripping employee benefits. The Supreme Court ruled this unconstitutional and implemented the ABC test.

Dynamex was a nationwide same-day delivery and courier service. They employed their California drivers as W-2 employees who received the benefits, payroll taxes, and perks of being a W-2 employee. Then in 2004, the company reclassified all of its California drivers into 1099 independent contractors to save employee costs.

The ABC test is now used to classify workers instead of the Borello Test

The California Employment Development Department (EDD) uses the new Assembly Bill 5’s ABC test to identify worker classification. However, the older Borello Test can also be used in less clear classification circumstances.

When it comes to correctly classifying your workers, how do you know which test to use and when?

Rideshare drivers will automatically be classified as 1099s with Prop 22

Proposition 22 appeared on the 2020 ballot as the rideshare and app-based driver responded to AB5. California Proposition 22 was passed by voters in California and defined app-based rideshare drivers, such as Lyft, Uber, and Grubhub drivers, as 1099 independent contractors instead of W-2 employees.

The Employment Development Department (EDD) sends audit letters through the mail. If you receive an audit letter, you have 30 days to reply. Typically, the agency audits back three years from the most recent tax filing. However, EDD sometimes will audit the previous year’s tax filings.

The Ultimate Guide to Payroll Tax Audits

In California, the Employment Development Department (EDD) conducts audits of payroll taxes across the state. During the audit process, the assigned agent looks at classification of W2 employees and 1099 workers, and whether the correct payroll taxes were collected on payments made to all workers. Business owners should ensure their business is prepared for an EDD tax audit and that they have adhered to the new ABCs of worker classification set out in AB-5.