Payroll Tax Problems with the EDD and FTB
Payroll Tax Trouble? You’re Dealing with Two Agencies — and One Aggressive State
If you’re a business owner in California — especially in Orange County — and you’re behind on payroll taxes, you may find yourself under pressure from not just the IRS, but also two powerful California agencies:
- The Employment Development Department (EDD)
- The Franchise Tax Board (FTB)
Together, they enforce everything from unpaid payroll withholding to corporate income tax, and their penalties can destroy a business if not resolved quickly.
In this guide, we’ll break down:
- The difference between the EDD and FTB
- How California enforces payroll tax debt
- What triggers EDD and FTB audits
- How to resolve problems and protect your business
Who Are the EDD and FTB?
The EDD (Employment Development Department)
The EDD administers:
- State payroll taxes
- Unemployment Insurance (UI)
- Disability Insurance (SDI)
- Employment Training Tax (ETT)
- Wage reporting requirements
The FTB (Franchise Tax Board)
The FTB enforces:
- Corporate and personal income taxes
- Withholding on independent contractors and out-of-state payees
- Collection of delinquent payroll taxes forwarded by EDD
Yes — the FTB can step in to collect for the EDD if you don’t pay.
π FTB Collections Process: A Guide for California Taxpayers
Common Payroll Tax Problems in California
1. Late or Missing Payroll Tax Filings
Failure to file payroll tax returns (DE 9, DE 9C, DE 34) on time can trigger:
- Immediate penalties
- Suspicion of misclassification
- Risk of audit by both EDD and FTB
2. Unpaid Withholding Taxes
If you deducted taxes from employee paychecks and failed to remit them to the EDD, that’s considered trust fund recovery liability — and it may become personally enforceable.
3. Worker Misclassification
Calling employees “independent contractors” when they don’t meet the legal test (especially under AB-5) can trigger massive back taxes, penalties, and interest.
EDD will often audit based on:
- Anonymous complaints
- 1099 filings without matching W-2s
- Industry risk factors (construction, tech, hospitality)
Learn More: Behind on Payroll Taxes in Orange County
4. Corporate Suspension by the FTB
If you ignore EDD tax debt, the FTB may suspend your corporate status, which:
- Voids contracts
- Blocks access to courts
- Freezes business bank accounts
5. Failure to Respond to Notices
Both agencies issue:
- Notices of Tax Due
- Demand Notices
- Notice of Levy (via FTB or EDD Collection)
Ignoring them can lead to wage garnishments, levies, and liens.
π What Happens If You Ignore FTB Notices
How EDD and FTB Enforce Payroll Tax Debt
EDD Audits and Enforcement
- In-person or remote audits
- Review of payroll, 1099s, bank statements, contracts
- Reclassification of workers = back taxes + penalties
If you don’t cooperate, the EDD may refer the balance to the FTB for collections.
FTB Collection Actions
- Bank levies
- Wage garnishments
- Franchise tax suspensions
- Liens filed on business or personal assets
π How to Stop an FTB Bank Levy Before It Starts
How to Fix Payroll Tax Problems in California
1. Respond to Notices Immediately
Open every notice. Read it. Don’t delay.
If you don’t understand it — contact a CPA immediately.
2. File Any Missing Returns
Even if you can’t pay right now, filing returns:
- Stops escalating penalties
- Shows good faith
- Helps reduce enforcement
3. Request a Payment Plan or Settlement
- For smaller EDD balances: request an Installment Agreement
- For larger liabilities: explore Offer in Compromise or Hardship Deferral
π FTB Offer in Compromise vs Installment Agreement
4. Prepare for a Reclassification Audit
If the EDD suspects misclassification:
- Gather all contracts, W-9s, invoices, and payment logs
- Be ready to prove independence (multiple clients, control over work, etc.)
A CPA or tax attorney can help present a strong case.
5. Work With a Tax Pro Who Handles Both Agencies
You’ll need someone who can:
- Represent you in EDD audits
- Negotiate with FTB collections
- Prevent duplicate enforcement or conflicting resolutions
Did You Know? (California Payroll Tax Enforcement Facts)
- The EDD can assess penalties up to 15% for unpaid payroll taxes under California Unemployment Insurance Code §1126.
- Worker misclassification penalties can exceed $25,000 per violation under California Labor Code §226.8.
- Once referred, the FTB may file a lien or levy under California Revenue & Taxation Code §19221 and §19231, even on debt originally assessed by EDD.
- Business entities with unresolved EDD or FTB debt may be suspended under California Corporations Code §2205, meaning they cannot legally operate, sue, or enforce contracts.
How Boulanger CPA Helps Orange County Employers
We help businesses and contractors in Anaheim, Irvine, Santa Ana, Tustin, and beyond:
- Respond to EDD payroll audits
- Resolve FTB collections tied to payroll tax
- Prepare and file missing returns
- Defend against worker misclassification claims
- Stop levies and protect your business operations
π Call
657-218-5700
π
www.orangecounty.cpa
Frequently Asked Questions
What agencies handle payroll tax enforcement in California?
The Employment Development Department (EDD) handles state payroll taxes like UI, SDI, and PIT. The Franchise Tax Board (FTB) may also pursue enforcement if you owe income tax withholding. The IRS handles federal payroll taxes.
What happens if I miss a payroll tax deposit?
Missing deposits can trigger penalties and enforcement from the EDD or IRS. These agencies can issue levies, file liens, or even assess personal liability through the Trust Fund Recovery Penalty (TFRP) in severe cases.
Can I be personally liable for unpaid payroll taxes?
Yes. Both the IRS and EDD can assess personal liability for certain unpaid payroll taxes, especially if you were responsible for collecting and remitting the funds but failed to do so.
What’s the difference between EDD and IRS payroll enforcement?
EDD audits focus on worker classification and timely deposit of California payroll taxes. The IRS focuses more broadly on Form 941 and federal withholding. Both can enforce aggressively but follow different rules and timelines.
Should I hire a CPA to help with payroll tax issues?
Absolutely. A CPA can help you assess your liability, represent you in audits, negotiate payment options, and avoid personal risk. Fast action can also help stop levies and garnishments before they happen.
ο»Ώπ£ 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.
π Learn more at www.orangecounty.cpa or call (657) 218-5700.
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