Getting Ahead of the Game: How to Pre-Audit Before an EDD Payroll Tax Audit

 

No company ever wants to see that envelope stamped with “Employment Development Department” land in their mailbox. Payroll tax audits can feel overwhelming, even if you think you’ve done everything right. But here’s the truth: much of the stress comes from being caught off-guard. Preparing in advance—conducting what’s often called a “self-audit”—can save you sleepless nights, penalties, and a lot of scrambling.

So, how do you pre-audit yourself before the EDD does it for you? Let’s break it down.

Start with the Basics: Employment Classification

This is where a large chunk of audits turn messy. Independent contractor vs. employee—sound familiar? The state is particularly focused on this distinction. Take a hard look at your staff. Are any “independent contractors” actually working with you like full-time employees? Do they follow set hours, use your tools, or take direct supervision? If the answer is yes, that classification might be risky.

A smart move is reviewing contracts, job descriptions, and the actual day-to-day working relationship. Don’t just rely on paperwork labels. The EDD will check consistency across the board.

Payroll Records: Clean, Clear, and Accessible

Auditors love details. Missing paystubs, inconsistent wages, or incomplete reporting can flag deeper issues. Before an audit, make sure your payroll books are reconciled with your bank statements. W-2s and 1099s should line up with what you’ve reported.

Ask yourself: if someone who knows nothing about your business walked in, could they look at your records and clearly understand each payment? If the answer is no, you’ll want to tighten up your system. Consider pulling sample files yourself to test for clarity.

Cross-Check Your Tax Filings

A surprising number of businesses forget this step. Your quarterly and annual payroll tax filings should align with the figures on your employee records. It’s not uncommon to have small discrepancies—say, payroll software rounding issues—but repeated mismatches raise suspicion. Review your DE 9, DE 9C, and federal returns and make sure the story they tell matches your actual payroll.

Review Business Expenses Linked to Wages

Auditors don’t just scan your payroll in isolation. They often compare your claimed expenses with payroll records. If, for example, you deducted large amounts under “contract labor” but issued hardly any 1099s, that raises questions. Go through your categories and double-check they align with what you’ve reported.

Internal Habits That Can Save You

Sometimes, it’s not about fixing records but building habits that keep you clean year after year:

• Keep digital and paper records consistent.
• Store copies of all tax forms in a single accessible folder.
• Run your own quarterly review just like you would a financial checkup.

Little steps like this make a huge difference when you’re under scrutiny.

When It’s Time to Call in Professional Help

Even with the best preparation, payroll tax rules are complex. California, especially has strict interpretations. If something doesn’t add up—or worse, if you find a potential misclassification—it’s better to address it now with guidance rather than waiting for an auditor to point it out. An EDD audit attorney in Los Angeles or a seasoned tax lawyer in Los Angeles professionals often provide can act as a buffer, helping to correct mistakes and communicate with the state on your behalf.

Final Thoughts

A payroll tax audit doesn’t have to spell disaster. With a careful self-audit, most of the uncertainty disappears. Think of it as preventative maintenance—like checking your car before a road trip. By proactively reviewing your records, cleaning up discrepancies, and getting expert eyes when you need them, you’ll not only minimize risk but also gain peace of mind. And that might be the most valuable outcome of all.