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In 2026, our client underwent a worker classification audit conducted by the California Employment Development Department. The audit covered multiple years and examined potential exposure for unemployment insurance, employment training tax, state disability insurance, and state income tax withholding. After a structured and documented response, the agency closed the audit with no liability assessed.
Understanding the Stakes
The California Employment Development Department enforces state payroll tax laws and conducts worker classification audits to determine whether workers were properly treated as independent contractors or employees. If reclassification occurs, the agency may assess unemployment insurance contributions, employment training tax, state disability insurance, and personal income tax withholding, along with penalties and interest. At the federal level, the Internal Revenue Service applies common law control factors when evaluating worker status for employment tax purposes.
Worker classification audits can present serious financial and operational risks for businesses, particularly when multiple years and categories of payments are under review. A reclassification determination may result in multi-year assessments for unemployment insurance, employment training tax, state disability insurance, and personal income tax withholding, in addition to penalties and statutory interest. In this matter, the breadth of documentation requested and the number of issues under review created significant exposure for our client.
Dallo Law Group’s Legal Strategy
We approached the audit proactively and methodically. Working closely with the client, we ensured that the 2024 tax return was filed accurately and completely by the applicable deadline, establishing a clean compliance baseline. The EDD reviewed Forms 1099, bank statements and transfer activity, contractor workpapers, payroll records, and filed state returns. Each category of payment was reconciled to supporting documentation.
To address classification and payroll concerns directly, we drafted a thorough payroll reconciliation and carefully reviewed the 2024 audit materials issued by the agency. Throughout the process, we managed audit preparation and served as the primary point of communication with the auditor, ensuring all responses were documented, supported, and consistent with the client’s filings. By organizing the facts and addressing each issue with precision, we were able to demonstrate that the client’s reporting and treatment of workers did not warrant an assessment.
The Audit is Closed
Following submission of the audit response package and supporting documentation, the EDD closed the examination with no additional unemployment insurance, employment training tax, state disability insurance, or personal income tax withholding assessed. For our client, this outcome eliminated significant financial risk and allowed them to move forward with confidence and operational stability.
Key Takeaways for California Business Owners
Worker classification audits often turn on documentation. Businesses should maintain written independent contractor agreements, reconcile Forms 1099 to actual payments, retain detailed records of services performed, and review payroll filings for consistency before submission. Early organization and structured responses materially affect audit outcomes.
How Dallo Law Group Can Help
Attorney Chase Canevari managed the audit process from preparation through final resolution, overseeing documentation review and serving as primary contact with the agency.
Dallo Law Group represents businesses and individuals facing tax examinations, worker classification disputes, and government audits. Our team focuses on strategic preparation, detailed financial analysis, and effective advocacy designed to protect our clients’ interests and resolve matters efficiently.
This result reflects our continued commitment to delivering strong outcomes in challenging tax and audit matters. Businesses facing audits or compliance challenges can rely on Dallo Law Group for strategic guidance and strong representation.
