Can You Settle Payroll Tax Debt with the EDD?

Understanding Your Options When You Owe California Employment Taxes

If you owe payroll taxes to the California Employment Development Department (EDD), you’re probably wondering:

“Can I settle this for less than I owe?”

The answer? Sometimes — but it’s not as simple as the IRS process.

The EDD doesn't have a well-publicized Offer in Compromise program like the IRS. But there are workable strategies to resolve payroll tax debt — including abatement, payment plans, appeals, and in rare cases, negotiated settlements.

In this article, we’ll break down:

• When (and how) the EDD allows settlements
• What to do if you're already under audit or assessment
• The key difference between IRS and EDD resolution processes

If you're not sure why you owe payroll taxes in the first place, start with our article on EDD payroll tax audit triggers.

Why EDD Payroll Tax Debt Is So Dangerous

Unlike regular tax debt, payroll taxes are trust fund taxes. The government considers this “money you withheld from employees but didn’t pay.”

That makes them:

• Non-dischargeable in bankruptcy
• Personally assessable (they can pierce the corporate veil)
• Subject to liens, levies, and wage garnishment

If you’re facing EDD payroll tax debt, do not ignore it. Your business — and your personal assets — may be at risk. Being behind on payroll taxes in California can quickly escalate to liens, garnishments, and even personal assessments.

Can You Settle EDD Payroll Tax Debt?

The Short Answer:

Yes, but only in exceptional cases. The EDD may consider a negotiated resolution if:

• The business is closed or insolvent
• The taxpayer demonstrates extreme financial hardship
• It’s unlikely the state will recover the full balance through collection
• You cooperate fully and disclose all relevant financials

This is not a true “Offer in Compromise” program — but in practice, EDD agents may settle under administrative discretion.

What Are the Realistic Resolution Options?

1. Installment Agreement

For open businesses or individuals with stable income, the EDD may allow:

• Monthly payment plans
• Short-term deferrals
• Negotiated terms based on cash flow

Penalty and interest continue to accrue unless waived.

2. Petition for Reassessment / Appeal

If the debt resulted from an audit, you may still have time to file:

• A Petition for Reassessment
• A hearing with the California Unemployment Insurance Appeals Board (CUIAB)

This is your best shot to:

• Reduce the original liability
• Challenge misclassification findings
• Prove payments were properly made

See our case study: EDD reclassification penalties explained.

3. Penalty Abatement Request

You may be eligible for penalty relief if you can show:

• Medical hardship
• Natural disaster or theft
• Reliance on a tax professional
• Partial compliance with payment or filing

The EDD may waive some or all penalties — even if they won't reduce the underlying tax.

4. Voluntary Disclosure (For Non-Filers)

If you haven’t filed payroll taxes at all but want to come clean:

• The EDD offers Voluntary Disclosure Agreements
• These may reduce penalties and limit lookback periods

Important: Don’t initiate this without guidance — once you contact the EDD, the clock starts.

When Will the EDD Consider “Settlement”?

You must show:

• You cannot reasonably pay the full amount
• You have provided all requested documentation
• You’re not currently operating a business with ongoing payroll tax liabilities
• There is no fraud or willful misconduct involved

The more compelling your hardship story — and the cleaner your financial disclosures — the better chance you have.

If you’ve also faced California FTB audit triggers or CDTFA issues, this may be part of a broader tax problem. We coordinate across agencies to build a unified defense.

What If You Do Nothing?

The EDD may:

• File a personal-level tax lien
• Issue a levy on business or personal accounts
• Garnish wages
• Refer your case to the Franchise Tax Board or Attorney General's Office
• Assess officers and shareholders personally for unpaid amounts

At this point, you could even face the IRS trust fund recovery penalty if federal payroll tax issues overlap with state liabilities.

Why Work With Boulanger CPA

We help California business owners resolve:

• EDD payroll tax audits
• Back payroll tax assessments
• Multi-agency disputes with EDD, FTB, and CDTFA
• Worker misclassification issues
• Trust fund recovery enforcement

We’ve helped clients:

• Get penalty relief
• Reduce assessments
• Stop aggressive collections
• Restore compliance and close out audits

For strategies, check out our guide on how to survive an EDD audit, or schedule a consult to explore more in Defend What’s Yours.

Ready to Resolve Your EDD Tax Debt?

If you’re facing payroll tax problems with the EDD, don’t go it alone. We’ll build a resolution strategy that protects you and gives you options.

Orange County-based, serving all of California.  Virtual consults and remote resolution available

👉 Schedule your free audit strategy call

📣 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.