EDD vs. IRS Payroll Audits – Key Differences California Employers Need to Know
If you’re a business owner in California and you’ve received a payroll tax audit notice, you might be wondering: Is it from the EDD or the IRS—and how different are they?
The answer: very different.
The IRS enforces federal payroll tax compliance. The EDD enforces California state employment taxes. And although both agencies care about things like worker classification and proper reporting, their procedures, penalties, and expectations are completely separate—and often confusing.
At Boulanger CPA and Consulting PC, we represent California businesses facing both state and federal payroll tax audits, and we’ve seen firsthand how critical it is to understand the differences before you respond. This guide explains:
- What each agency looks for
- How audits are triggered
- What makes one more aggressive than the other
- What you can do to protect your business
Quick Overview: EDD vs. IRS Payroll Audits
| Feature | EDD | IRS |
|---|---|---|
| Jurisdiction | California | Federal |
| Main Focus | UI, SDI, PIT | FUTA, FICA, Federal Income Tax |
| Worker Test | ABC Test / Borello | Common Law Control Test |
| Typical Trigger | Contractor payments, 1099s, tips | Late filings, payroll discrepancies, 941 mismatches |
| Records Requested | Contractor payments, 1099s, tips | 941s, W-2s, 1099s, payroll journals |
| Penalties | High and frequent | High—but negotiable |
| Enforcement | Often referred to CDTFA or FTB | Enforced by IRS Collections |
| Settlement Flexibility | Low | Moderate (Offer in Compromise possible) |
What the EDD Looks for in a Payroll Tax Audit
The Employment Development Department (EDD) enforces:
- Unemployment Insurance (UI)
- State Disability Insurance (SDI)
- Employment Training Tax (ETT)
- California Personal Income Tax (PIT) withholding
The most common EDD payroll tax audit triggers include:
- Use of 1099 workers in a high-risk industry
- A contractor applying for unemployment
- A mismatch between 1099s and reported income
- Anonymous tips or whistleblower complaints
- Past audit findings or CDTFA referrals
EDD auditors use the ABC test or Borello factors to evaluate worker classification. They can also impose EDD reclassification penalties explained in detail during the audit, which often shocks employers who aren’t fully prepared.
Knowing how to survive an EDD audit means having your payroll records organized, your contractor agreements clearly defined, and a defense strategy in place before the first meeting with an auditor.
What the IRS Looks for in a Payroll Tax Audit
The Internal Revenue Service (IRS) enforces:
- Federal Income Tax Withholding
- Social Security and Medicare (FICA)
- Federal Unemployment Tax (FUTA)
Common IRS payroll audit triggers include:
- Form 941 discrepancies
- Failure to deposit payroll taxes
- Worker reclassification complaints
- High 1099 contractor use
- Late filings or unfiled payroll forms
The IRS uses the Common Law Test (control, relationship, independence) to evaluate worker classification. When unpaid payroll taxes are severe, the IRS may pursue business owners personally through the IRS trust fund recovery penalty.
Key Differences in Audit Style
EDD: State-Level, Often More Aggressive
- Shorter timelines
- Stricter classification rules (especially under AB5)
- More likely to assume misclassification
- Refers unpaid debt to CDTFA for collection
- Less flexibility to negotiate settlements
IRS: More Procedural and Negotiable
- Slower audit cycle
- Allows representation and appeals at multiple levels
- May allow
penalty abatement or
Offer in Compromise
- Uses more subjective classification standards
Which Is Worse?
It depends on the situation.
- If your main issue is
contractor classification, the EDD is likely to hit you harder.
- If your problem is
nonpayment of payroll deposits, the IRS can pursue you personally under the
Trust Fund Recovery Penalty.
- If you’ve ignored both, you may end up dealing with both agencies simultaneously—which is where we come in.
How We Defend Clients in EDD and IRS Payroll Audits
At Boulanger CPA and Consulting PC, we:
- Analyze classification risks under both standards
- Organize audit-ready payroll documentation
- Represent you during interviews and correspondence
- Challenge flawed assessments and audit assumptions
- Defend against trust fund penalties and personal liability
- Coordinate resolution strategies across both agencies
If you’re being audited by one agency, you need to prepare for the other. They often share data.
Real Example – EDD and IRS Tag-Team Assessment
A delivery business in Orange County used 1099 drivers for years. The EDD audited first, reclassified workers, and assessed over $90,000. Six months later, the IRS initiated a payroll audit based on shared data. Our team stepped in, challenged the EDD’s application of the ABC test, and helped reduce IRS exposure by proving the drivers met the federal common law test. We settled the federal case for $11,200 and negotiated a payment plan with the CDTFA.
This is the type of case where clients tell us they had to explore more in Defend What’s Yours just to understand their rights and protect their businesses.
We Help California Businesses Handle Payroll Audits from Start to Finish
We work with:
- Contractors
- Restaurants
- Transportation companies
- Home care providers
- Beauty and wellness businesses
…and any company using a mix of W-2 and 1099 workers
From audit defense to debt resolution, we’ve got you covered.
EDD or IRS Payroll Audit? Call Now Before It Escalates
Let’s get in front of it—before penalties, personal liability, or collections begin.
📞 Call (657) 218-5700 or Schedule a Confidential Strategy Session
Frequently Asked Questions
What’s the main difference between EDD and IRS payroll audits?
EDD audits focus on California payroll tax compliance, especially worker classification, while IRS audits examine federal payroll tax reporting and withholdings.
What triggers an EDD payroll audit?
EDD audits are often triggered by worker misclassification, discrepancies in payroll tax filings, or referrals from other agencies like the IRS.
What triggers an IRS payroll audit?
IRS audits may result from mismatched W-2 or 1099 reporting, failure to deposit payroll taxes, or inconsistencies in employment tax returns.
Can I face both an EDD and IRS audit?
Yes. EDD and IRS share data. An issue identified in one audit often leads to a parallel audit by the other agency.
Which agency is stricter?
The EDD is often more aggressive with reclassification cases, while the IRS has broader collection powers, including federal liens and levies.
How far back can audits go?
EDD usually audits three years, while the IRS generally audits up to three years but can extend to six if significant underreporting is suspected.
Should I hire a CPA for EDD or IRS audits?
Yes. Professional representation ensures proper defense, minimizes penalties, and protects your rights during both state and federal payroll audits.
other articles of interest
- EDD Payroll Tax Help
- IRS Tax Relief Help
- Trust Fund Penalty – What It Means
- Can You Settle Payroll Tax Debt with the EDD?
📣 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.
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