Until September 2nd, 2020, CA EDD auditors had put audit cases on hold in order to assist the agency with the unemployment insurance benefits process. With the onset of the COVID-19 layoffs and the increase in administrative requirements that brought, California EDD did not have enough manpower to complete and process the millions of UI claims. Some business owners who had audits in progress were received of the investigation process for months during this time. No more.
For business owners with EDD audits of their payroll and 1099 contractors whose audits were suspended temporarily, the grace period is over. As of September 2, 2020, EDD has announced that audits that were pending and in process have now resumed. EDD will now, potentially, open new audits of companies who hired 1099 contractors and subsequently had those workers file UI claims with the state alerting EDD to their potential misclassification.
When California businesses hire and classify workers as 1099 contractors based solely on the information collected from those contractors, they run the risk of misclassification. If those 1099 workers subsequently file for unemployment, EDD will open an investigation into the hiring entity. Whether the error was a mistake or a deliberate effort to reduce overhead costs does not matter. The law introduced by Assembly Bill 5 which was signed in January of this year clearly redefines the criteria for contractor classification.
With the upcoming wave of EDD audits, the agency will likely target companies who hired contractors, requiring them to re-classify their workers as W-2 employees and assess payroll taxes, penalties, and interest.
Need a refresher on 1099 vs W-2 classifications check out our article here: https://www.caltaxadviser.com/blog/2020/09/edds-confirms-it-has-resumed-tax-audits/
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