State Bar of California
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California Payroll Tax Problems & EDD Audits

California business who have federal payroll tax problems will generally also have California payroll tax problems. The reverse is also true, and a California payroll tax problem can become a federal payroll tax problem. In California payroll taxes are administered by the California Employment Development Department also know as the EDD. Our  tax attorneys represent many clients who have California EDD audits involving payroll tax disputes.

Most California payroll tax problems arise from a dispute with the EDD over whether or not workers are employees or independent contractors. Many EDD payroll tax problems begin when a worker who is classified by a business as an independent contract files for unemployment insurance. Especially if the worker is successful in convincing the EDD that he is an employee it is likely to lead to a California payroll tax audit. Although the rules for classifying a worker as an independent contractor for California payroll tax purposes are similar to the rules for IRS payroll taxes they are not identical.

The IRS generally applies a 20 factor test. The California Employment Development Department focuses more on the right of the principal to control the manner, mode, method and means of performing the details of the work. The California Supreme Court stated that strong evidence in support of an employment relationship is the right to discharge at will, without cause. In many cases if it can be proven that the worker had his own business the EDD will determine that individual is not an employee. In evaluating payroll tax disputes the EDD also looks at the following factors in their California EDD audit:

  • Whether or not the one performing the services is engaged in a separately established occupation or business.
    The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal without supervision.
    The skill required in performing the services and accomplishing the desired result.
    Whether the principal or the person providing the services supplies the instrumentalities, tools, and the place of work for the person doing the work.
    The length of time for which the services are performed to determine whether the performance is an isolated event or continuous in nature.
    The method of payment, whether by the time, a piece rate, or by the job.
    Whether or not the work is part of the regular business of the principal, or whether the work is not within the regular business of the principal.
    Whether or not the parties believe they are creating the relationship of employer and employee.
    The extent of actual control exercised by the principal over the manner and means of performing the services.
    Whether the principal is or is not engaged in a business enterprise or whether the services being performed are for the benefit or convenience of the principal as an individual.

Our EDD attorneys will evaluate all of these factors in order to dispute a California EDD audit determination that your workers are employees and not independent contractors. In some cases a worker can be an independent contractor for federal payroll tax law, but an employee for California payroll tax purposes. One example is unlicensed workers. The California Unemployment Insurance Code provides that if a contractor has unlicensed subcontractors working for him those unlicensed subcontractors are automatically deemed to be employees even if they meet all of the tests for independent contractor status.

Some California payroll tax audits can lead to a finding of payroll tax fraud by the EDD. This may happen if an employer pays workers in cash over a number of years, and fails to file Forms 1099 or makes other attempts to conceal the existence of those workers. Our EDD attorneys have experience in representing businesses in California EDD payroll tax fraud audits.

Filing for bankruptcy will not solve your California payroll tax problems. However, even if your workers were not correctly treated as independent contractors our tax lawyers can work with the EDD to try and eliminate penalties as well as reduce the total amount of California payroll taxes owed.

If a corporate taxpayer can not pay the California employment taxes it owes, the EDD may hold corporate officers and stockholders who willfully fail to pay California payroll taxes personally responsible. Unlike the IRS trust fund recovery penalty for federal payroll taxes, responsible officers and shareholders will be held responsible not only for the trust fund portion of the California payroll taxes, but the entire amount of the California State employment taxes including all interest and penalties. Our California tax lawyers can evaluate whether or not officers and shareholders are personally responsible, and if they are not, represent them before the Employment Development Department potentially saving hundreds of thousands of dollars.

When negotiations break down with the California Employment Development Department, our California tax lawyers can appeal your case to the an administrative law judge. We will work with you to develop witnesses, and documentary evidence to help you prevail in your payroll tax dispute. If appropriate our tax lawyers will file legal briefs with the administrative law judge to convince him or her to resolve the payroll tax dispute in your favor. This takes time, and you should contact our California tax lawyers as early as possible to evaluate your California payroll tax case.

A California payroll tax audit, and its appeal is a very complicated process requiring a knowledge of the California employment tax laws, as well an understanding of the procedures of the EDD. If your case must go to court then an understanding of state court rules and procedures, along with the rules of evidence are required. Our California tax attorneys can represent you in this process from beginning to end with your California employment tax problems.

Call us today at 800.380.TAX LITIGATOR or contact us online.

Tax Problem Attorney Blog - California Payroll Tax Problems
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