EDD Audits: Misclassification of Independent Contractors
The California Employment Development Department (EDD) may audit your business. Based on their audit, EDD may determine that some of your workers are not independent contractors but employees subject to employment tax-related deductions. In that event, EDD will issue a “Notification of Audit Results and Right to Review Audit File”. EDD may at the same time issue a “Notice of Assessment”, or they may give you some time to review and discuss the “Audit Results” before issuing an assessment.
If you are assessed, EDD will go back 3 years and assess your business with back taxes, interest and penalties relative to all of those workers determined to have been misclassified. You can pay the assessed taxes, interest and penalties at any time to stop the accumulation of interest and penalties. Once you receive a Notice of Assessment you have 30 days to file a Petition for Reassessment with the California Unemployment Insurance Appeals Board (CUIAB). Your appeal of the assessment will be sent to the Office of Tax Petitions and an Administrative Law Judge (ALJ) will be appointed to review and hear your case. You can appeal the Decision of the ALJ in a multi-step process and eventually take your case to a court of law.
Our firm regularly handles Petitions for Reassessment and CUIAB hearings and appeals. It can be a drawn out and costly process. If you have independent contractors, we suggest that you regularly consult your experts to review whether they really are properly classified as such. You definitely should consult counsel before any EDD audit so you are prepared to put your best case forward.