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TAX CASE EVALUATION

EDD LAWYER IN SAN DIEGO

Dallo Law Group is where you can find the best EDD lawyer in San Diego. Our professionals are aggressive, have up-to-date tax knowledge, and are both efficient and reasonable in the navigation processes to get you solutions to any matters involving the workplace. Whether you are an employer or employee, we have a wide variety of practice areas related to employment law, tax, and employment litigation.

What Is The Employment Development Department (EDD)?

The Employment Development Department (EDD) was formed in 1935 and is one of the largest departments in the state and is responsible for administering the payroll tax regulations for California businesses and individuals. Likewise, most business owners are very aware of the constant menace of an EDD audit request. In particular, EDD audit notices are now surfacing due to the obstructed unemployment claims filed by 1099 contractors, and there were a whole lot of them due to the impact of COVID.

Once a 1099 contractor files for unemployment insurance, an immediate red flag is raised on the business associated with the claim because a contractor is not eligible for unemployment. Even if the applicant was simply unaware of the ineligibility, your business can be entering hot water because the EDD usually takes unemployment claims as a sign that the 1099 contractor may be an incorrectly classified worker.

The variety of services the EDD provides includes:

  • Administration of the Unemployment Insurance and State Disability Insurance programs.
  • Audits and collects payroll taxes and maintains employment records for millions of California workers.
  • Connects job seekers with employers and administers federally funded workforce development programs.
  • Gathers, analyzes, and publishes labor market information

What Is An EDD Audit?

An EDD audit checks to see if you classified workers correctly and finds out whether or not you paid the right amount of employment taxes. In short, the EDD conducts audits to ensure that businesses pay payroll taxes and employees receive their entitled benefit coverage. Many EDD payroll tax problems begin when a worker who is classified by an employer as an independent contract files for unemployment insurance. Any type of business in California can be chosen for a payroll tax audit. Thus, it is imperative that you properly follow your responsibilities with correctly classifying your workers, and withholding and remitting employment taxes for contract employees.

During this audit, the agency will uncover if the employer was controlling the worker’s manner, mode, method and means of performing the details of the work. The California Supreme Court states that strong evidence in support of an employment relationship is the right to discharge at will, without cause. Furthermore, in many cases, if it can be proven that the worker had his own business, the EDD will typically determine that individual is not an employee. However, for audits of tax periods beyond January 1, 2020, the EDD will follow the “ABC test” that California has codified into law. This makes it much more likely that the worker is an employee unless they fall under a specific exception.

After the EDD audit, the findings may show that you properly classified workers and paid them the amount that you reported. On the other hand and due to the evidence uncovered, you may be subjected to additional back taxes that you owe including penalties and interest. The audit covers the 12 most recently completed calendar quarters, making up a total of three years. However, if you did not file any returns, the audit might cover a longer period of time.

AB5 Law Explained

The AB5 law is often referred to as the gig worker law, and it is how a person is defined as either a W2 employee or an independent contractor in the state of California. Businesses and HR professionals are often left wondering if they are being compliant with the many nuances of this new law, which is the key way to stay out of EDD audit trouble. Under AB5, workers in California are assumed to be W2 employees and therefore are eligible for benefits like overtime pay, breaks, the right to minimum wage, healthcare, retirement, unemployment insurance and more, while 1099 contractors are not.

To classify a worker as an 1099 contractor, employers must apply the ABC test and determine that all 3 qualifications found in the test are present. It can be very tricky to get this determination right, and so to ensure proper compliance, securing the guidance of a tax attorney is your best bet. Here are the 3 criteria:

A: The worker is free from the control and direction of the hiring entity in connection with the work’s performance, both under the contract for the performance of the work and in fact.

B: The worker performs work that is outside the usual course of the hiring entity’s business.

C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The AB5 law is complex and hard to understand. Phrases such as “free from control” and “usual course of hiring entity’s business” can be difficult to decipher. EDD is strictly interpreting the third element, requiring that a contractor work with multiple businesses performing the exact same services for which a hiring entity issues a 1099. In addition, the law has seen a lot of scrutiny, criticism and change in its short life. California legislators have introduced multiple amendments and exemptions to the law, while there are still ongoing fights in the courts with some well-known gig economy companies seeking to revise the way classification occurs.

What If You Disagree With The Audit

If you disagree with the audit’s findings you can file a petition for redetermination and have your case heard by an Administrative Law Judge (ALJ). During this hearing, the judge will review the evidence to determine the employer was controlling the worker’s manner, mode, method and means of performing the details of the work or if they met the ABC test. The hearing is usually in person but can be done remotely or by video conference. This is the taxpayer’s main opportunity to protest the audit without paying the tax and seeking a refund.

What If You Disagree With The Audit

Businesses that cannot unequivocally determine that all 3 factors of the ABC test are met by workers, must classify workers as W2 employees in order to stay compliant with this established law. Once a business has misclassified an employee as an 1099 contractor – whether intentionally or not – you may be at risk of an audit and penalties from EDD.

There are other triggers that bring on these audits including, most recently, 1099 contractors filing for unemployment benefits. Others include direct employee complaints for whatever reasons to the EDD or the late filing of payroll taxes/quarterly reports. Finally, the EDD may just randomly pick your business for an audit.

How To Prepare For The EDD Hearing

In preparation for the hearing, you should gather your evidence and be prepared to give testimony. This is the taxpayer’s chance to provide additional evidence and cross-examine the EDD auditor. The ALJ will ask questions, review your documents, and make a decision on your appeal, so you want to do all you can to win your case. If you do not agree with the ALJ’s decision you can appeal the decision to the California Unemployment Insurance Appeals Board, but that review will be limited in scope.

Evidence you should bring along with you will be dependent on how you wish to dispute your case. Particularly, if your dispute is centered on the proper classification of your worker, you should be familiar with how California comes to this determination and the exceptions under the ABC test.

Some simple tips to bear in mind include:

  • be on time
  • be thorough in your preparation
  • answer the questions posed to you in a professional manner
  • be prepared to ask the auditor questions
  • gather your thoughts for an effective closing statement

How Our San Diego EDD Attorneys Can Help

Dallo Law Group stays at the forefront of employment tax law and litigation and that is why we are consistently ranked among the top San Diego EDD tax attorneys. Our team includes both CPAs and tax lawyers who have diverse backgrounds. Our biggest priority is to provide our clients with the best possible results for their situation.

An EDD audit is an intricate procedure which can be draining and stressful. Dallo Law Group will work with you to develop the appropriate witnesses and documentary evidence to help your payroll tax dispute go in your favor. It is important to note that if an employer can not pay the California employment taxes it owes, the EDD may hold the officers and stockholders who willfully fail to pay California payroll taxes personally responsible. No one should be left in such an unfavorable situation.

No matter how complicated, our professionals can represent you in an EDD audit from beginning to end and with the individualized attention that you and your case deserve. Whether you are in the midst of an EDD audit or down to the EDD hearing, we are here to help. Dallo Law Group offers a consultation and case evaluation, so contact our firm today to get started.