Small businesses, of which there are thousands in California, spend the highest percentage of time of any business entity preparing and submitting taxes. Federal, state, and local tax requirements are extremely complex and change every year.
Multiple agencies administer different taxes, and each has its own set of rules and methods of payment. It is no wonder that small business owners often have common tax issues and outcomes of inadvertent noncompliance.
EDD payroll tax problems in California typically come down to two things: misclassifying workers as independent contractors, and falling behind on payroll tax deposits.
The California Employment Development Department administers four separate payroll taxes: Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and Personal Income Tax (PIT) withholding. If you’re behind on any of them — or if EDD questions how you’ve classified your workers — the exposure can reach back three or four years and include both the back taxes and penalties on top.
The whole question of whether someone is your employee hinges on a three-part test under California law — and the default answer is that they are.
California’s ABC test, codified at Labor Code § 2775 through AB 5, starts from the presumption that any worker providing services is an employee. To treat someone as an independent contractor, you have to satisfy all three parts: (A) the worker is free from control over how the work is performed, (B) the work falls outside the usual course of your business, and (C) the worker is customarily engaged in an independently established trade or occupation.
Part B is where most businesses get tripped up. If you run a construction company and you hire someone to do framing, that work is not “outside the usual course” of your business, regardless of how the arrangement is labeled. If EDD reclassifies your contractors as employees, it assesses back UI, SDI, ETT, and PIT withholding for every one of them — often three to four years back, with interest and penalties added.
California payroll tax deposits are due on a schedule tied to your federal deposit frequency — missing them triggers a 15% penalty from EDD, and personal liability follows.
The late deposit penalty is 15% of the amount due. That adds up quickly on payroll that runs into the hundreds of thousands of dollars.
Here’s the part that catches business owners off guard: California Unemployment Insurance Code § 1735 allows EDD to assess personal liability against any person with control over payroll who willfully fails to remit. Officers, owners, check signers, and anyone with authority over which bills get paid can be assessed individually, even after the company shuts down.
An employer in trouble with EDD is often in trouble with the IRS at the same time.
The IRS equivalent is the Trust Fund Recovery Penalty (TFRP) under IRC § 6672. It assesses 100% of the employee’s share of FICA and withheld income tax against any responsible person who willfully failed to remit. The willfulness standard does not require intent to evade — courts have found willfulness when a business owner paid other creditors while knowing payroll taxes were overdue. EDD and IRS investigations run on parallel tracks. An audit from one agency does not prevent the other from opening its own.
EDD audits typically cover the three most recent tax years and focus on worker classification, payroll records, and the gap between what you reported and what the records show.
Auditors request payroll records, contractor agreements, 1099s, and bank statements. They compare your reported wage base against total compensation paid and flag discrepancies. Cooperation matters, but statements made during an audit can expand its scope. If the audit looks likely to produce a large misclassification assessment, having counsel present before the auditor interviews anyone is worth considering.
Resolution options include installment agreements, Offers in Compromise, voluntary disclosure, and challenging the audit findings on appeal.
If you have not yet been contacted by EDD, voluntary disclosure is the strongest option. EDD’s Voluntary Disclosure Program allows employers to come forward, report unreported wages, and pay back taxes with significantly reduced penalties. Early self-correction consistently produces better outcomes.
If EDD has already assessed a liability, an Installment Payment Agreement is typically the first step. For businesses or individuals who cannot pay in full, EDD also has an Offer in Compromise program — separate from the IRS’s — with similar eligibility standards: doubt as to collectibility or hardship that makes full collection inequitable.
If the assessment itself is wrong, there is a formal appeals process through the California Unemployment Insurance Appeals Board (CUIAB). Appeals on misclassification can succeed, but the ABC test sets a high bar and the burden is on the employer to prove all three prongs.
Yes. Under California Unemployment Insurance Code § 1735, EDD can assess individuals — officers, owners, and others with control over payroll — for unpaid UI, SDI, and PIT withholding if the business fails to remit. The personal assessment is not limited to what the business still owes; it attaches once the liability is established and the company does not pay.
California’s ABC test under Labor Code § 2775 sets the standard for worker classification. All three prongs must be satisfied to treat someone as an independent contractor: they must be free from your control, their work must fall outside your core business, and they must operate an independently established business. Most staffing arrangements fail Part B, which is why EDD audits so frequently end in reclassification.
EDD will issue a Notice of Assessment after the audit closes. You have 30 days to file a written protest, and if the protest is denied, you can appeal to the California Unemployment Insurance Appeals Board (CUIAB). The CUIAB is an independent administrative tribunal; hearings are conducted by administrative law judges. You can also appeal further to the superior court.
The 15% late deposit penalty is typically assessed at the time of the audit finding and is generally not waived just because you enter an installment agreement. Some penalty abatement is available for first-time failures with a reasonable cause, but it requires a specific written request and EDD evaluates it on a case-by-case basis.
If you’re working through an EDD payroll tax problem — whether it’s an audit letter, a reclassification assessment, or falling behind on deposits — our overview of California payroll tax obligations covers the full landscape, and our tax debt resolution page walks through your options for resolving back payroll tax debt. Book a free 15-minute call to talk through where things stand.
Whether you’re dealing with an EDD audit, trust fund recovery penalties, or unfiled 941s, payroll tax issues compound quickly. A brief review can clarify what you’re facing and what resolution options apply.
Discuss My Payroll Tax Issue → Or call: (619) 378-3138
The Board of Equalization is the California public organization that administers the state sales and use tax law and regulations. The BOE also conducts audits, collects unpaid California state sales and use taxes, and administers the state property tax.
There are presumptions of the tax code that the BOE follows in its operation and decision-making process. The BOE presumes:
As if taxes were not complicated and frightening enough, the federal and state taxing authorities have a variety of devices in their arsenal to compel payment and stave off penalties.
Tax liens, one of the most common of those devices, can cause trouble not just with your property and bank accounts, but with your credit score and ability to obtain lines of credit.
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If you have employees, you are liable for federal payroll taxes. Some taxes are withheld from your employee’s wages, some you must pay yourself.
The Internal Revenue Service, or IRS, administers payroll taxes as part of its responsibilities. Remaining in compliance means understanding how and when payroll taxes are calculated, filed, and paid.
Sales tax is added to almost every piece of merchandise sold in the State of California. It adds to the city, county, and state coffers to help pay for services everyone enjoys.
Sales tax can also be a lure into illegal activity. Sometimes it is not intentional. A retailer makes an error that can be attributed to complexity of the tax code. This is merely negligence.
Other times, it is very intentional. Then it becomes sales tax fraud.
With so much conflicting information about the California self employment tax process floating around online, it can often be difficult for a lot of people to figure out precisely what these taxes are, how they’re calculated, paid, and what the consequences of non-payment might be.
As an employer, you are obliged to file payroll tax returns and pay payroll taxes. While the obligation can feel burdensome, especially when times are tough and cash flow is slow, this is obligation that you must never delay. Substantial penalties may accrue to any employer who doesn’t file correctly, leaving you in a far worse situation than before.
The consequences of falling behind on your taxes are difficult for anyone, but when we are talking about businesses, sales taxes, and the California Department of Tax and Fee Administration (CDTFA), the results can be devastating. The CDTFA is particularly aggressive about investigating and pursuing unpaid sales taxes, and will often demand immediate payment of any liability, no matter what other types of financial responsibilities or consequences the business may be facing. One of the most powerful “weapons” in the CDTFA’s arsenal of collection tactics is the tax lien. Understanding how liens work, why they happen, and what to do if one is recorded against you is important in order to protect your business during times of financial difficulty.
If you own a business which produces tangible goods, then you are obligated to pay sales tax to the Board of Equalization. There are, however, a number of exemptions to this rule, some of which apply to various types of goods and others which attach to certain buyers. It is important to understand which types of business can get a partial or full sales tax exemption and the consequences for improperly failing to pay sales or use tax. Sales tax is a complex area of law, with a huge range of exemptions that apply to various goods or types of sellers. Penalties for failing to pay sales tax are steep, so a little knowledge now can keep you from a huge liability later.