Case Study – EDD Payroll Audit $78K Reduced to $8K

How We Helped a California Business Fight Back and Win

When the Employment Development Department (EDD) contacts you for a payroll audit, most business owners panic — and understandably so.

California’s employment tax laws are complex, and the penalties for misclassification or underreporting can be devastating. In fact, many small businesses don’t even realize what the common EDD payroll tax audit triggers are until it’s too late.

In this case study, we’ll walk through how we helped one Orange County client:

• Respond to an unexpected EDD audit
• Defend their 1099 classifications
• Challenge proposed assessments
• And ultimately reduce a $78,000 liability down to just $8,200

For context on how EDD audits work, check out our full guide on how to survive a California EDD audit.

The Business

• Type: Independent contractor-based service business
• Location: Irvine, California
• Entity: S Corporation
• Staff: 1 W-2 employee, 8 active 1099 contractors
• Prior payroll filings: Filed intermittently (DE 9, DE 34), but inconsistently

The Problem: Unemployment Claim Triggers Audit

A former contractor filed for unemployment, and listed the client as their “employer.” This triggered an EDD audit, which opened a 3-year review period.

The EDD claimed:

• The contractor was misclassified
• No payroll tax had been paid
• Multiple other 1099s looked suspicious
• Estimated payroll tax + penalties = $78,000

This is a prime example of avoiding EDD reclassification penalties becoming a critical part of audit defense strategy.

Our Approach

We were brought in after the business received the audit notice.

Step 1: Record Review + Interview Preparation

We:

• Reviewed all contractor agreements
• Built documentation on contractor independence
• Prepared the business owner for the EDD interview
• Reviewed payroll reports, 1099-NEC filings, and time logs

Step 2: Challenge Worker Classification Assumptions

We demonstrated that:

• The “contractor” worked independently
• Provided their own equipment
• Had multiple clients
• Was not supervised or scheduled

We also argued that the other contractors passed the ABC test, and should not be reclassified as W-2 employees

For a deeper breakdown, see our article on avoiding EDD reclassification penalties.

Step 3: Reduce Estimated Payroll Liability

The EDD based their initial calculation on:

• Estimated wages
• Estimated payroll frequency
• Presumed penalties across multiple workers

We showed:

• Several contractors had no taxable relationship
• The assessed amounts were inflated
• The employer’s filings, while incomplete, were not fraudulent

We also prepared a Penalty Abatement Request showing good faith, partial compliance, and financial hardship. This helped prevent escalation to other agencies that often impose the IRS trust fund recovery penalty or California FTB audit triggers.

The Result

Initial assessment: $78,000

Final liability after:

• Worker classification challenge
• Partial payment plan
• Penalty abatement

$8,200 total due over 12 months.  No lien. No levy. No referral to other agencies.

Lessons for Business Owners

✅ Don’t wait until the audit is finalized — respond at the first notice
✅ 1099 vs. W-2 rules are aggressively enforced in California
✅ Keep strong documentation, even with “trusted” contractors
✅ Work with a CPA who understands EDD’s audit methods and appeal process
✅ Most importantly: push back. Auditors are often wrong — or overzealous

Many businesses also struggle when they are behind on payroll taxes in California, and a proactive defense can be the difference between survival and closure.

Why Work With Boulanger CPA

We represent California businesses during:

• EDD audits
• CDTFA sales tax audits
• Franchise Tax Board collections and income tax disputes

We know how to:

• Reconstruct records
• Challenge assessments
• Negotiate outcomes
• Stop liens and garnishments
• Coordinate across multiple state agencies

Our clients are typically:

• S corps
• Medical offices
• Construction or service firms
• Real estate and professional services companies

Get Help with Your EDD Audit Now

If you’re facing a payroll audit or a misclassification dispute, we can help — and fast.

Based in Orange County. Serving clients statewide. Virtual audit defense available across California.

👉 Schedule your free audit strategy call and explore more in Defend What’s Yours to protect your business today.

📣 About the Author

Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, a boutique tax resolution firm based in Orange County, California and trusted by high-income individuals and business owners across Southern California.

He is the author of Defend What’s Yours: A California Taxpayer’s Guide to Beating the IRS and FTB at Their Own Game, available now on Amazon. The book offers a step-by-step plan for resolving IRS and FTB tax debt without losing your business, your home, or your peace of mind.

With over a decade of experience resolving high-stakes IRS and State tax matters, Marc brings strategic insight to complex cases involving wage garnishments, bank levies, unfiled returns, and six-figure tax debts. He is known for helping clients reduce or eliminate tax liabilities through expertly negotiated settlements and compliance plans.

Marc is a Certified Public Accountant licensed in California and Oklahoma and holds the designation of Certified Tax Representation Consultant. He is a member of the American Society of Tax Problem Solvers (ASTPS) — the national organization founded by the educators and practitioners who have trained thousands of CPAs, EAs, and tax attorneys in IRS representation strategy.

Every case is handled with discretion, proven methodology, and direct CPA-led representation — not call center scripts.

📍 Learn more at www.orangecounty.cpa or call (657) 218-5700.