Payroll Tax Problems with the EDD and FTB

Introduction: 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.

👉 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.

👉 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

👉 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

👉 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

📞 Call 657-218-5700
🌐 www.orangecounty.cpa

Frequently Asked Questions

📣 About the Author

Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, based in Orange County, California.

With over a decade of experience helping individuals and businesses resolve serious IRS and State tax issues, Marc specializes in tax resolution strategies including Offers in Compromise, wage garnishment relief, and back tax compliance.

He is licensed as a Certified Public Accountant in both California and Oklahoma, and has a proven track record of helping clients settle complex tax debts and regain financial stability.

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