One of the biggest problems that we come across in payroll audits is employee reimbursements and independent contractor reimbursements. A lot of the times what will happen is an employee will get paid a normal paycheck and then they will spend their own money outside the context of the business to buy materials, to buy supplies, go post office do whatever. The business will write the employee a check out of their operating account and not run it through payroll.
rs-california-payroll-tax
EDD Independent Contractor Test
After verifying payroll and payroll tax withholdings, the EDD will next go through and verify all the workers that the business issued 1099s to. This is what is known as the EDD Independent Contractor Test. First, the EDD auditor will go through each 1099 worker in detail, one by one. Even 1099’s that were issued to businesses, landlords and others that are clearly not subject to payroll tax withholdings, you can pretty much count on the EDD auditor going through each one and verifying who was issued a 1099.
EDD Audit Payroll Tax Verification Test
In addition to the payroll verification test, the EDD will also look at personal income tax withholdings and make sure that the amounts listed match what the state has on file as well. Just to go back and clarify, the EDD audit is going looking at the wages and the income that the people earned. The EDD auditor is going through the payroll journal to make sure that the total wages is going to match. Now, this article discusses going through and doing a personal income tax withholding test.
Independent Contractor Audit – Initial Interview Purpose
In our last article, we examined the questions that are asked in an independent contractor audit. In this article, we would like to examine the purpose behind those questions in a little more depth.
EDD Independent Contractor Audit – Initial Compliance Interview
The first thing that happens in an EDD independent contractor audit is the initial compliance interview. The initial compliance interview serves a couple of different purposes. Number one, it is to get background information on the client. Number two, it is to get answers in place for different questions in case there is any problems or factual disputes that come up later. For example, one of the questions they ask you is “How many locations do you have?”. That way if they later get information on a location that you did not disclose, you could potentially dig yourself into trouble.
California Payroll Tax Audits and the General Ledger
During a payroll tax audit, the EDD is next going to go through the business’s general ledger in detail, the general ledger is important because the general ledger contains a record of all the payments the business made during the audit period in question. When the auditor goes through the general ledger, they are going to be looking for a couple of different things. Number one, is they’re going to be looking for payments to people. The auditor is looking for payments to people who may or may not have been a 1099 and they are going to be looking for payments to the business’s employees and toward 1099 contractors that were not listed on the W2 or the 1099 for whatever reason.
What to Do if the EDD Takes Your Money
The California Employment Development Department can legally withhold money owed to you by the state for repayment of debt. In other words, either through error or willful action, you owe a monetary debt to the State of California.
The EDD is within its legal rights to withhold money from a variety of programs and tax refunds if you do not pay up. It works with the California Franchise Tax Board, the State Lottery, and the State Controller to collect the outstanding debt.
How a Tax Attorney Can Help with Your Tax Lien
Our last few posts have been about how the various California state tax agencies handle tax liens.
A brief review:
- The Board of Equalization (BOE) administers the sales and use tax.
- The Franchise Tax Board (FTB) administers and enforces the individual and corporate state income tax laws and property taxes.
- The Employee Development Department (EDD) administers payroll tax and unemployment and disability insurance for the state.
Everything You Need to Know About Tax Liens, Pt. 2
In Part 1, you learned what a lien is, how taxpayers are notified of a lien, and what elements are required for a valid lien. In Part 2, you will read how a lien can impact your credit report, who has access to a list of those with liens, and what happens during bankruptcy and other financial events if a lien is involved.
Everything You Need to Know About Tax Liens, Pt. 1
The tax community is a house somewhat divided over the effectiveness of liens. On the one hand, the government needs to protect their interests in regards to taxes owed them. On the other hand, tax liens are filed against taxpayers with few or no assets to file a lien against.