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.

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

FAQ – Surviving a California EDD Audit

📣 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.