I Misclassified My Employees – What Will Happen Now That the EDD Is Involved?

On: June 25, 2023

Employees or independent contractors, what does it really matter? It matters a lot when it comes to the EDD. If you misclassify your employees, you can expect to be contacted by the EDD and you may find yourself facing some serious penalties at the same time.

An EDD audit is serious and should be handled by an experienced tax team that will not only protect your rights but protect your company too. Working with seasoned professionals can be the difference between saving your business and closing the doors.

If you are undergoing an EDD audit, do not attempt to do it alone and contact our experienced California tax accountants today at Leading Tax Group.

What Are My Options for Classifying My Employees?

There are four classifications used to classify employees within your company including independent contractor, employee, statutory employee, and statutory non-employee.

Independent Contractor

An independent contractor is someone who completes tasks for the company but is considered self-employed. These individuals are responsible for their own taxes.

Employee

An employee is someone who is paid regularly by the company and is also provided with protections at the state and federal level when it comes to their employment. Employers are required to pay income taxes on behalf of the employee.

Statutory Employee

A statutory employee is someone who is considered an independent contractor but is treated by the company as an employee for tax purposes. This occurs when the employee is self-employed and controls their hours but primarily works with only a single company

Statutory Non-Employee

A statutory non-employee is someone who is licensed and receives most of their income via commission such as direct sellers and real estate agents.

How Do I Know How to Classify an Employee?

There are certain factors that help determine how an employee should be classified. Simply stating or including that someone is an independent in a contract is not sufficient enough to determine the status of the employee.

Knowing exactly how to classify your employees is dependent on behavioral control, relationship, and financial control.

It can be difficult to determine exactly how to classify your employees and misclassification can lead to an EDD audit and penalties associated with the misclassification. Even though the misclassification may be a misunderstanding or error, it is still up to the company to classify all employees correctly.

What Are the Consequences for Misclassifying Employees as Independent Contractors?

There are hefty penalties that come along with misclassifying employees as independent contractors including:

• Federal tax penalties
• State tax penalties

Can the Penalties Be Waived?

It is possible to have the penalties for misclassifying an employee waived if you are able to prove that the misclassification was done in good faith. It is recommended that you work closely with a tax expert who can guide you through this process.

Leading Tax Group Can Help You Through an EDD Audit Due to Misclassifying Employees

Having the EDD audit or investigate you due to misclassifying your employees is a serious thing and can have serious consequences and hefty penalties associated with it. Knowing exactly how to classify your employees can be confusing but is a responsibility placed on you as a business owner.

If you have been told by the EDD that you have misclassified employees, one of our tax experts can help you. We offer EDD representation here in California and will walk you through the process of properly classifying your employees and providing the correct documentation to the EDD.

Don’t simply ignore the EDD or hope that they disappear because they will not. Give Leading Tax Group a call today to discuss your current tax situation and to secure representation.