Closed business gets audited by EDD for past transgressions.

Marcos ran his doors and flooring company from his home for 6 years.  The timing of his company’s growth coincided with the China tariff war during the Trump administration and the ensuing complexity with pricing and deliverables caused a level of complexity that became too much for Marcos and his partner to manage.  What started as a family business with a nice profit margin had devolved into family bitterness, tight margins and no time for the things Marcos went into business to accomplish in the first place.

They closed their doors in 2019.

So, when Marcos received notification that he was being audited for 2016, ’17, and ’18 by EDD and that there were pending criminal charges, he was taken completely by surprise.  How could he be audited for a business that he had already closed? If there were fines, there’s no business to pay them, would he be held financially responsible?

The audit trigger in Marcos’ case was an ex-employee filing for unemployment.  This triggers an immediate audit regardless of the validity of that claim.  In this case, the worker had been a 1099 and was not owed unemployment benefits.  The audit of the company started to reveal business practices that were not ideal.  Accounting was all done manually and not with a high degree of accuracy and there was very little oversight of the hiring and firing of employees.

Marcos knew the business wasn’t well-run, that’s why he closed it.  But this didn’t change the audit status from EDD and CFTB.  What could Marcos have done better?

Keeping records may be one of the most important roles in a company.  Your records validate everything you do, allowing you to defend your business practices no matter who scrutinizes them.  Clearly defining the rights of ex-workers is also best practice.  1099 workers do not qualify for unemployment insurance.  In Marcos’ case, he had disqualified 10 ou fo this 26 workers as 1099 contractors when they should have been part-time W-2 workers.  The distinction was in the hours and control the company had over those workers as well as the fact that they did not have other employment or seek other employment beyond the work they were doing for Marcos’ company.

If you are unsure about your workers’ status, get a got1099 report.  The report covers your workers’ licenses, insurance, and professional credentials, researches their legal status (are they a registered LLC or sole proprietorship, C or S corp), and do they do what your company does (a contractor who does what your W-2 employees do is incorrectly classified and will trigger fines and retroactive classification as a w-2 if you are audited.)