Businesses of all types, sizes, and stages of development call central California, Sacramento, Folsom, and Roseville home. Businesses ranging from high-tech multinationals to small retail stores operate in California. These businesses are fortunate to benefit from a highly-educated workforce and the stability that California’s social safety net can provide. An educated workforce and a business community that is responsible and invested in the community are just a few of the reasons why California’s economy is one of the world’s largest and most prosperous.
However, the level of development in central California did not occur over night or by accident. Rather, the business environment in California only developed due to companies paying their payroll taxes. Payroll taxes are essential to providing the services that Californians expect. Thus, when there is apparent non-compliance of this obligation, California tax agencies
What Is the Payroll Tax?
In California, the payroll tax is a deduction that is taken from the employee’s paycheck. The deduction is held by the employer and, in due course, is turned over to the state government. Because the employer collects and holds the money in trust for the government, payroll taxes are sometimes also referred to as trust fund taxes.
Whether one refers to this type of tax obligation as a payroll tax or as a trust fund tax, the California payroll tax covers four main programs in California. These include:
- California Personal Income Tax – The California personal income tax (PIT), is a tax that is levied on the income of California workers and others who derive income from California.
- State Disability Insurance Tax – The SDI tax provides funding for the state SDI program. This program provides temporary cash payments to workers who are unable to work because of an illness, injury, or the birth of a new child.
- Unemployment insurance Tax – California provides a robust UI system. The UI system provides for benefit payments to workers who have been laid off or otherwise become unemployed through no fault of their own.
- Employment Training Tax – The ETT is intended to ensure that California’s workforce remains skilled and competitive.
These taxes all make up the payroll tax. Businesses must collect, hold, and pay over this tax or the business itself and responsible parties can face significant liability.
Who Enforces the Payroll Tax in California?
In California, the payroll tax is administered by the Economic Development Department. The EDD handles an array of programs including unemployment, disability insurance, paid family leave, and certain tax obligations. However, if you or a close friend or family member has run into tax problems, you probably already realize that the EDD is a motivated and aggressive enforcement body. Many business owners report that they felt as if they needed to prove their innocence before the EDD would take their concerns and questions seriously.
Why Is My Company Facing a Payroll Tax Audit?
There is an array of reasons that can motivate a payroll tax audit. Unfortunately, small to mid-sized businesses frequently get caught-up in difficult EDD audits because of the nature of these businesses. On one hand, these businesses are attractive targets for tax enforcement actions because of the amount of revenue that can pass through the company. However, on the other hand, small to mid-sized businesses often lack the compliance resources that are more common at large corporations.
This lack of compliance resources can sometimes lead to a business keeping insufficient payroll tax records. The failure to keep these records for a minimum of four years is a violation of the law in itself. Depending on the circumstances, the taxpayer may need to retain the records for a longer amount of time. In any case, the business will end up facing penalties that include not only the failure to pay and report trust fund taxes but also the failure to keep records. There are a number of other factors that can motivate an audit. These may include:
- A failure to file payroll taxes or a history of noncompliance.
- Inconsistent statements or facts that seem to indicate that the number of employees is being understated.
- The business is in an industry where noncompliance is common.
- The business has extensive cash dealings.
- The business has “paper transactions” or has structured transactions in a way to evade taxes.
- The business uses check cashing services or otherwise tries to convert receivables to cash.
If your company is being audited for issues with payroll taxes, working with an attorney is essential.
Payroll Tax Audit Attorneys Provide guidance for Sacramento, California Businesses
The attorneys of the NewPoint Law Group are proud to guide California businesses through EDD audits. We can assess your handling of payroll taxes, and offer legal advice and guidance regarding problems and potential solutions. To schedule a confidential initial consultation at our Irvine or Los Angeles law offices, call 800-358-0305 or contact us online.