How to Survive a California EDD Audit
Your Game Plan for Handling Payroll Tax Audits the Right Way
The
Employment Development Department (EDD) doesn’t play around when it comes to payroll tax audits.
Whether triggered by a former worker, a misfiled return, or a red flag shared by the Franchise Tax Board (FTB), an EDD audit can lead to major financial exposure — even for small businesses that thought they were in the clear. Many employers first learn about EDD payroll tax audit triggers only after the state comes knocking.
In this article, we’ll walk you through:
- What happens in an EDD audit
- The most common mistakes employers make
- How to respond to audit letters
- And how to protect your business if you're already under review
If you’ve received a notice, your first move should be to read our post on what triggers an EDD payroll tax audit.
WHY WAS I SELECTED FOR AN EDD AUDIT?
EDD audits are usually triggered by:
- Worker misclassification (1099 vs. W-2)
- Late or missing DE 9 payroll filings
- A former worker filing for unemployment
- A Franchise Tax Board (FTB) or CDTFA referral
- A mismatch between contractor payments and 1099 filings
If the CDTFA or FTB is already on your case, don’t be surprised if the EDD shows up too. In fact, some clients have been flagged after California FTB audit triggers rolled into EDD reviews.
To prepare for overlapping issues, start with our
California state tax enforcement guide.
STEP-BY-STEP: WHAT HAPPENS IN AN EDD AUDIT?
1. YOU RECEIVE AN AUDIT NOTIFICATION LETTER
The EDD sends a written notice requesting:
- Payroll records
- 1099s and W-2s
- Bank statements
- Worker classification documents
- DE 9 and DE 34 forms
2. INITIAL CONTACT
You’ll be assigned an EDD auditor who will schedule:
- A phone call or in-person interview
- A records review period
- Possible worker interviews (past or present)
3. THE FIELD AUDIT
This is where things get serious. The auditor will:
- Review your classification of contractors and employees
- Check for missing withholdings
- Look for signs of misclassification
- Reconstruct payroll if documentation is incomplete
Expect a 3-year lookback period — or longer if you didn’t file or filed incorrectly.
4. PRELIMINARY FINDINGS
You’ll receive a proposed audit summary, showing:
- Unpaid UI, SDI, ETT, and PIT
- Penalties and interest
- Adjustments to worker classifications
You have the opportunity to dispute or clarify these before the findings are finalized.
WHAT THE EDD IS REALLY LOOKING FOR
- 1099 workers who should’ve been W-2s
- Missing or late payroll tax filings
- Gaps between what you paid and what you reported
- Evidence of employment relationship: hours, tools, training, control
If you’ve made any of these errors — even unintentionally — the EDD will estimate the liability in their favor.
TOP MISTAKES EMPLOYERS MAKE DURING EDD AUDITS
TALKING TO THE AUDITOR UNPREPARED
Don’t answer casually. Every comment is evidence.
TURNING OVER DISORGANIZED RECORDS
Poorly formatted data increases the odds of estimated assessments.
FAILING TO ADDRESS PRIOR YEAR CONTRACTOR PAYMENTS
If the auditor sees large 1099s without W-2s, they’ll dig deeper.
OVEREXPLAINING OR GUESSING
Stick to facts. If you're unsure, say “Let me get back to you.”
WHAT IF YOU’VE MISCLASSIFIED WORKERS?
You may be hit with:
- Back payroll taxes
- 10–25% penalties
- Interest
- Trust fund recovery liability
- Additional audits from CDTFA or FTB
Many businesses search for EDD reclassification penalties explained because the costs can spiral quickly if not handled properly.
If you're worried about contractor issues, read our article on avoiding EDD reclassification penalties.
CAN YOU SETTLE OR NEGOTIATE AN EDD AUDIT?
Yes — but there’s no formal settlement program like the IRS.
You can:
- Request penalty abatement
- Set up installment agreements
- Provide evidence to reduce the assessed amount
- Dispute classification findings
- Appeal to the California Unemployment Insurance Appeals Board (CUIAB)
WHY WORK WITH BOULANGER CPA
We’ve helped California employers:
- Survive EDD audits
- Reclassify workers properly
- Negotiate reduced payroll tax assessments
- Coordinate defense across EDD, CDTFA, and FTB
- Fix prior-year filings and avoid future audits
We work with:
- S corps
- Contractors and agencies
- Medical and dental practices
- Real estate brokerages
- Professional service firms
GET EDD AUDIT HELP NOW
Whether you’ve just received a notice or are mid-audit, we can help. Don’t wait until penalties pile up or your bank accounts are at risk.
Based in Orange County. Serving all of California. Virtual consultations available.
👉 Schedule your free audit strategy call
In this article, we’ll walk you through:
- What happens in an EDD audit
- The most common mistakes employers make
- How to respond to audit letters
- And how to protect your business if you're already under review
If you’ve received a notice, your first move should be to read our post on what triggers an EDD payroll tax audit.
Why Was I Selected for an EDD Audit?
EDD audits are usually triggered by:
- Worker misclassification (1099 vs. W-2)
- Late or missing DE 9 payroll filings
- A former worker filing for unemployment
- A Franchise Tax Board (FTB) or CDTFA referral
- A mismatch between contractor payments and 1099 filings
If the CDTFA or FTB is already on your case, don’t be surprised if the EDD shows up too.
To prepare for overlapping issues, start with our
California state tax enforcement guide.
Step-by-Step: What Happens in an EDD Audit?
1. You Receive an Audit Notification Letter
The EDD sends a written notice requesting:
- Payroll records
- 1099s and W-2s
- Bank statements
- Worker classification documents
- DE 9 and DE 34 forms
2. Initial Contact
You’ll be assigned an EDD auditor who will schedule:
- A phone call or in-person interview
- A records review period
- Possible worker interviews (past or present)
3. The Field Audit
This is where things get serious. The auditor will:
- Review your classification of contractors and employees
- Check for missing withholdings
- Look for signs of misclassification
- Reconstruct payroll if documentation is incomplete
Expect a 3-year lookback period — or longer if you didn’t file or filed incorrectly.
4. Preliminary Findings
You’ll receive a proposed audit summary, showing:
- Unpaid UI, SDI, ETT, and PIT
- Penalties and interest
- Adjustments to worker classifications
You have the opportunity to dispute or clarify these before the findings are finalized.
What the EDD Is Really Looking For
- 1099 workers who should’ve been W-2s
- Missing or late payroll tax filings
- Gaps between what you paid and what you reported
- Evidence of employment relationship: hours, tools, training, control
If you’ve made any of these errors — even unintentionally — the EDD will estimate the liability in their favor.
Top Mistakes Employers Make During EDD Audits
Talking to the auditor unprepared
Don’t answer casually. Every comment is evidence.
Turning over disorganized records
Poorly formatted data increases the odds of estimated assessments.
Failing to address prior year contractor payments
If the auditor sees large 1099s without W-2s, they’ll dig deeper.
Overexplaining or guessing
Stick to facts. If you're unsure, say “Let me get back to you.”
What If You’ve Misclassified Workers?
You may be hit with:
- Back payroll taxes
- 10–25% penalties
- Interest
- Trust fund recovery liability
- Additional audits from CDTFA or FTB
If you're worried about contractor issues, read our article on avoiding EDD reclassification penalties.
Can You Settle or Negotiate an EDD Audit?
Yes — but there’s no formal settlement program like the IRS.
You can:
- Request penalty abatement
- Set up installment agreements
- Provide evidence to reduce the assessed amount
- Dispute classification findings
- Appeal to the California Unemployment Insurance Appeals Board (CUIAB)
Why Work With Boulanger CPA
We’ve helped California employers:
- Survive EDD audits
- Reclassify workers properly
- Negotiate reduced payroll tax assessments
- Coordinate defense across EDD, CDTFA, and FTB
- Fix prior-year filings and avoid future audits
We work with:
- S corps
- Contractors and agencies
- Medical and dental practices
- Real estate brokerages
- Professional service firms
Get EDD Audit Help Now
Whether you’ve just received a notice or are mid-audit, we can help. Don’t wait until penalties pile up or your bank accounts are at risk.
Based in Orange County. Serving all of California. Virtual consultations available.
👉 Schedule your free audit strategy call and explore more in Defend What’s Yours.
Frequently Asked Questions
Why am I being audited by the EDD?
Common triggers include worker misclassification, mismatched payroll tax filings, failure to file returns, or employee complaints.
What records will the EDD request?
Expect requests for payroll journals, employee files, 1099s, W-2s, timecards, tax returns, and bank statements. Organized documentation is key to minimizing adjustments.
How far back can the EDD audit?
EDD typically audits three years of payroll records, but this can extend if fraud or willful misclassification is suspected.
What penalties can result from an EDD audit?
Penalties may include unpaid payroll taxes, failure-to-withhold penalties, interest, and fraud assessments in severe cases.
Can an EDD audit lead to IRS involvement?
Yes. The EDD often shares audit findings with the IRS, which may trigger additional federal payroll tax audits.
What should I do if I disagree with audit findings?
You can file a petition or appeal EDD assessments. Professional representation strengthens your case and protects your rights.
How can I survive an EDD audit?
Maintain accurate records, review worker classifications regularly, and seek professional guidance before and during the audit process.
📣 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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