rs-california-payroll-tax Archives

How One Business Owner Beat a Payroll Tax Audit—and What You Can Learn from Her

April 23, 2026November 25, 2024 by Aliyah Yates

For most small business owners, receiving a payroll tax audit notice is an anxiety-inducing event that makes you question every contractor agreement and expense report. That’s exactly what happened to Donna Simcoe, the owner of Simcoe Consultants, when she opened her mail to find an Employment Development Department (EDD) audit notice waiting for her.

What began as a moment of panic turned into a story of triumph. Donna worked with us to handle her payroll tax audit and passed with flying colors. In this video, we unpack Donna’s journey, the strategies that worked for her, and the lessons every business owner can take away to prepare for—and even prevent—payroll tax audits.

From Panic to Preparation

Key Takeaways

From Panic to Preparation
Worker Classification: A Tricky Balancing Act
The Anatomy of a Payroll Tax Audit
How Brotman Law Helped Donna Succeed
Lessons for Every Business Owner

Donna Simcoe is a seasoned professional in the medical publications field, running her consultancy with the help of independent contractors, including freelance writers and graphic designers. For years, her business operated smoothly—until the audit notice arrived.

Like most business owners, Donna felt overwhelmed and unsure of what to do next. Turning to her accountant for advice, she was directed to an article on our website. The article—a step-by-step guide to payroll tax audits—resonated with Donna and ultimately led her to book a consultation with Sam Brotman, Managing Attorney at the firm.

From the first meeting, Sam walked Donna through the audit process and assured her that with the right preparation, she could handle the situation confidently.

Worker Classification: A Tricky Balancing Act

One of the key concerns in Donna’s case, and a central focus of many payroll tax audits, was worker classification.

For workers, misclassification can mean losing out on tax benefits like deductions for business expenses.
For employers, the stakes are even higher: misclassification can result in back taxes, penalties, and compliance headaches.

Carlos Gomez, Senior Associate Attorney at Brotman Law, joined the case to help Donna navigate this tricky area. Carlos explained that laws like California’s AB5 are designed to protect workers from being unfairly classified as independent contractors. But in practice, these laws often leave business owners scrambling to prove they haven’t done anything wrong.

Auditors frequently approach 1099 forms with suspicion, assuming misclassification until proven otherwise. For Donna, this meant demonstrating that her business acted as the architect of strategy, outsourcing writing and graphic design work. Proving this distinction required meticulous preparation to address the auditor’s concerns.

The Anatomy of a Payroll Tax Audit

If you’ve never been through a payroll tax audit, here’s how it typically plays out:

The Notice: It all begins with an official letter requesting documents.
The Review: Auditors comb through the submitted materials, looking for inconsistencies or red flags.
The Meeting: You (or your legal representative) sit down with the auditor to answer questions and clarify details.
The Outcome: The audit concludes with one of three results: no changes, a refund, or an assessment of additional taxes and penalties.

For Donna, a no-change audit was the goal—a result that requires thorough preparation, clear documentation, and strategic responses to every question.

How Brotman Law Helped Donna Succeed

Donna’s success wasn’t a matter of luck. It was the result of careful planning and expert execution. Here’s what we did to turn the tide in her favor:

Pre-Audit Preparation: We created detailed profiles for each of Donna’s contractors to demonstrate why they were classified as independent workers.
Strategic Positioning: We addressed potential red flags directly, demonstrating that Donna’s consultancy serves as the architect of strategy, outsourcing specific services to independent contractors who were not integral to her core business—a crucial distinction in classification disputes.

By addressing these issues proactively, we set the stage for a smooth audit process.

Lessons for Every Business Owner

Donna’s story isn’t unique. Payroll tax audits are increasingly common, and every business owner can benefit from the lessons she learned:

Don’t Wait to Seek Help: If you’re unsure about your compliance, consult a professional sooner rather than later. Legal expertise can save you time, money, and stress.
Review Your Contractor Agreements: Well-drafted agreements can protect you and clarify the nature of your working relationships.
Stay Educated: Just because others in your industry operate a certain way doesn’t mean it’s legally compliant. Understanding the rules can help you avoid costly mistakes.

The Happy Ending

After a few weeks of preparation and strategic responses to the auditor’s inquiries, Donna’s audit concluded as a no-change audit. She owed no additional taxes or penalties—a testament to the power of thorough documentation and legal support.

Reflecting on her experience, Donna credits Brotman Law for not only resolving her audit but also empowering her with knowledge and confidence in her business practices.

Final Thoughts

Payroll tax audits might seem like an unavoidable storm, but with the right preparation, they don’t have to be catastrophic. Donna’s case shows that proactive measures, legal guidance, and a clear understanding of worker classification can make all the difference.

If you’ve received an audit notice—or want to ensure your business is audit-ready—don’t hesitate to reach out to Brotman Law. We’re here to help you navigate the complexities of compliance and keep your business on solid ground.

California Payroll Tax Audits and Defending Independent Contractors

April 23, 2026January 19, 2022 by Brotman Law

Key Takeaways

You may be familiar with or have heard of a twelve-factor test or a three-factor test or a lot of different tests that the EDD supposedly uses to classify independent contractors.
Through my years of professional experience and time spent in a lot of California payroll tax audits, I will just tell you that a lot of this stuff is bogus.
You must keep in mind that the independent contractor rules are put into place in order to protect employees who are being classified, or misclassified as 1099 workers to avoid payroll taxes.

You may be familiar with or have heard of a twelve-factor test or a three-factor test or a lot of different tests that the EDD supposedly uses to classify independent contractors.

Through my years of professional experience and time spent in a lot of California payroll tax audits, I will just tell you that a lot of this stuff is bogus.

Audits of independent contractors essentially come down to two things:

revenue generation, and
control.

Employment Development Department Installment Agreement – Part Two

April 23, 2026November 12, 2021 by Brotman Law

If an entity which enters into long-term agreement is a corporation, LLC or an LLP, and the remaining balance is more than $10,000 of overall assessable tax liability amount, a form DE 204 must be filed. DE 204 establishes liability of corporate responsible persons in regards to assessed tax liability of the corporation.

Key Takeaways

If an entity which enters into long-term agreement is a corporation, LLC or an LLP, and the remaining balance is more than $10,000 of overall assessable tax liability amount, a form DE 204 must be filed.
In any case, EDD will also require written explanation of how the liability was created.
EDD may require additional supporting documentation regarding financial statement entries. Long-term agreement must be approved by EDD’s lead senior tax compliance representative or tax compliance supervisor.

In any case, EDD will also require written explanation of how the liability was created. EDD also will require financial statements, personal or business, with documentation regarding financial status such as loan denials, tax returns, bank statements, accountant’s financial reports, etc.

EDD may require additional supporting documentation regarding financial statement entries. Long-term agreement must be approved by EDD’s lead senior tax compliance representative or tax compliance supervisor.

Employment Development Department Installment Agreement – Part One

April 23, 2026November 10, 2021 by Brotman Law

Under California law, taxpayers have a legal obligation to report and pay contributions and withholdings when due. If a taxpayer becomes delinquent in the payment of amounts due, the Employment Development Department (EDD) will take appropriate action to collect the full amount immediately.

Key Takeaways

Under California law, taxpayers have a legal obligation to report and pay contributions and withholdings when due.
The EDD recognizes that sometimes it is in the best interest of the state and in the interest of a California taxpayer that EDD allows an installment agreement to liquidate over a period of time an amount owed by taxpayer.
A taxpayer can request installment agreement by phone, by letter or by completing and filing an Installment Agreement Request (DE 927B).

The EDD recognizes that sometimes it is in the best interest of the state and in the interest of a California taxpayer that EDD allows an installment agreement to liquidate over a period of time an amount owed by taxpayer.

Employee Payroll Taxes: How the EDD Handles Misclassified Workers

April 23, 2026November 5, 2021 by Brotman Law

Managing employee payroll taxes can get quite complicated, with a number of areas being particularly opaque. One of those is the question of employee classification; is a person properly classified as a worker or an independent contractor?

Misclassifying workers as independent contractors carries with it some significant consequences, including penalties and even potential fraud prosecution, so it is a topic worth exploring in some detail.

California Payroll Tax: SUI, ETT, SDI & PIT Employer Guide

April 23, 2026August 13, 2021 by Brotman Law

The California payroll tax structure for an employer in this state is based on four distinct taxes, commonly referred to as the CA SUI, ETT, SDI, and PIT payroll taxes. There are different rates for each of these taxes and the calculation methods are different as well.

California Payroll Tax Appeals – Part Two

April 23, 2026June 7, 2021 by Brotman Law

During an appeal, the taxpayer should prepare and file a pre-trial brief or memorandum of points and authorities, in which he or she describes the relevant law and its application to his or her case in support of of it.

Key Takeaways

During an appeal, the taxpayer should prepare and file a pre-trial brief or memorandum of points and authorities, in which he or she describes the relevant law and its application to his or her case in support of of it.
The taxpayer may want to locate and interview helpful witnesses, including workers previously interviewed by EDD, principals of the business and its management employees.
It is worthwhile noting that an Administrative Law Judge may order the taking of interrogatories (a set of written questions to opposing party, answers to which may later be used as evidence).

The taxpayer may want to locate and interview helpful witnesses, including workers previously interviewed by EDD, principals of the business and its management employees.

California Payroll Tax Appeals – Part One

April 23, 2026June 4, 2021 by Brotman Law

Key Takeaways

Assessments become delinquent if not paid before they become final, and subject to a penalty of 10%.
Therefore, filing an appeal generally extends the amount of time the taxpayer has to pay.
Employment tax assessments imposed by the EDD under UIC is appealed before an administrative law judge.

It is important to note that according to Unemployment Insurance Code (“UIC”) Section 1735, an officer, owner or any person in charge of affairs of any corporation, LLC or LLP, is personally liable for the amount of the contributions, withholdings, penalties, and interest unpaid by said business entity, if business entity willfully fails to pay the amount.

Assessments become delinquent if not paid before they become final, and subject to a penalty of 10%. UIC Section 1135, Sections 1222 and 1224 provide that assessments become final (and delinquent) after 30 days from an assessment date, or the taxpayer petitions or appeals assessment, within 30 days of an administrative law judge or appeals board decision date.

Therefore, filing an appeal generally extends the amount of time the taxpayer has to pay.

What Is EDD Offer In Compromise?

April 23, 2026December 12, 2020 by Brotman Law

Tax attorney consultation at Brotman Law

Key Takeaways

There are certain types of people that will go to great lengths to save money.
There is a clear line between saving money and breaking the law, and it is not just “the little people,” who are expected to pay their taxes.
It is not just income earned legally that is taxable, either.

There are certain types of people that will go to great lengths to save money. I’m not talking about eating a strict diet of ramen noodles and taking the bus when you could afford to drive – I’m talking about tax avoidance.

Should I Represent Myself in an IRS Audit?

April 23, 2026July 17, 2020 by Brotman Law

Well it depends, but not usually. First of all, the mistake that a lot of taxpayers make is they think that they can handle the audit because they think either a they’re smarter than the auditor or the errors on the return aren’t really that severe. The problem with that is a taxpayer who goes into a situation with an auditor, unless that taxpayer is a tax attorney or a CPA, is probably not going to have the same level of knowledge about how audits work as the auditor. So even if the taxpayer is familiar with the law, the taxpayer is generally not familiar with the way that audits work and the procedure with that and so the risk is that even if the tax loss is minimal, the taxpayer could potentially put themselves into a damaging situation. So for example, if you’re not really used to changing tires and you get a flat tire on the road, yes you could change the tire yourself. There is the possibility that you’ll do a reasonably good job and change the tire and then everything will be okay, but there’s also the possibility that you might make a mistake. If you believe that there is a mistake on your return and if that mistake is significant, meaning it’s over five thousand dollars in tax back to the government, then you may want to consider hiring a representative to help you because once you get into a situation where there’s an audit and their adjustments are being made, then the penalty conversation comes into play and so the more adjustments that are made on the return, the more it increases

Key Takeaways

Well it depends, but not usually. First of all, the mistake that a lot of taxpayers make is they think that they can handle the audit because they think either a they’re smarter than the auditor or the errors on the return aren’t really that severe.
the likelihood that the auditor is going to penalize the taxpayer.