In addition to the payroll verification test, the EDD will also look at personal income tax withholdings and make sure that the amounts listed match what the state has on file as well. Just to go back and clarify, the EDD audit is going looking at the wages and the income that the people earned. The EDD auditor is going through the payroll journal to make sure that the total wages is going to match. Now, this article discusses going through and doing a personal income tax withholding test.
Just like with the income side of things, the EDD auditor is going to look at the tax that was withheld and make sure that matches for each employee. The auditor is going to go to the W2 and they are going to look at the federal income tax withheld and the state tax withheld on a payroll tax level. Then, the EDD auditor is going to go through and look at the report fillings to the IRS and the state of California and then look at what was reported with the employee.
During most EDD audits, you will see that the EDD will ask for a W4 in a payroll tax audit. What they are doing is looking at the information that the employee reported to the employer originally. The EDD auditor is verifying any exemptions and any marital status, and basically verifying that there has being proper withholdings on the employee's end. The auditor is verifying that to check on the employee's records and to make sure the employer's records are correct.
After doing a sample of an employee, the EDD will usually go a step further and they will reconcile the total payroll to total wages in order to make sure that those amounts match as well. Usually, there is a year-end summary that is performed that is filed with the state. In California, that is called a DE 9. The EDD auditor will verify that information and that it matches the payroll journal just to make sure that the total payroll is accurate. The auditor will take a sample and then verify that sample against the total. As long as you can do the same thing prior to the audit, essentially pre-auditing tax withholdings, the result should come out fine during the EDD audit.
Occasionally, the EDD will break it down on a quarter by quarter basis. The auditor will actually go through and look at wages that were being reported within a given quarter, and they will go quarter by quarter for a year or for a half year, and then run the verification test that way. The auditor will go back and look at what was reported on the payroll journal and will compare that information to what was reported on the payroll tax returns.
As we have said before, if everything matches, the test is passed and you have no problems. If the records do not reconcile properly, then it will usually trigger opening other years, and the EDD auditor will go through and verify everything on an actual basis. In most situations, though, you are going to see consistent reporting between payroll tax that was reported and wages that were reported. It is only when you have a situation where there has been poor financial controls, or there's been a change in accountants where you may have some reporting discrepancies.