Examiners verify wages were reported correctly, contributions paid, and workers classified properly. Officer compensation and cash wages are common issues.
WorkMinty publishes general educational information for small business owners. It is not tax, legal, or accounting advice. Tax rules change and vary by state and situation. Consult a qualified CPA, enrolled agent, or attorney before making decisions or responding to a government audit.
Educational only · Last reviewed May 30, 2026
Examiners compare:
Mismatches trigger questions.
If workers were paid as contractors but EDD determines they are employees, the department may assess UI and SDI on back wages, plus penalties.
California uses the ABC test for most industries (see our worker classification articles). Labels on contracts are not decisive.
For corporations, unreasonably low or missing officer wages can be an issue in some contexts. S-corporations in particular should discuss reasonable compensation with a CPA.
Paying workers off the books is a serious violation. Examiners look for patterns: round cash withdrawals before payday, lack of withholding, etc.
Reconcile payroll tax reports to your books each quarter. In Payroll Calculator, run pay before the quarter closes and export history for your records.
The Employment Development Department audits employers for UI, SDI, ETT, and worker classification. It is separate from the IRS and can reach back several years.
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