Free Tax Guide
What Happens During a California Independent Contractor Audit?
Key Takeaway
California Independent Contractor audits by EDD focus on worker classification under the ABC test (adopted in AB 5) and specific exemptions under AB 2257. Four key areas of focus: (1) the ABC test application; (2) Borello multi-factor test for exempt relationships; (3) statutory exemptions; and (4) documentation of contractor status. The short version is that California post-AB 5 treats workers as employees unless the employer can establish all three parts of the ABC test. AB 2257 provides specific exemptions for professions and industries.1
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California contractor audit framework.
The Four ABC Test / Exemption Analyses
PrimaryABC Test
ExemptBorello Test
StatutoryAB 2257 Exemptions
DocumentationContractor Evidence
| Analysis | Test2 |
|---|---|
| ABC Test | A, B, C all satisfied = IC |
| Borello Test | Multi-factor common law |
| AB 2257 Exemptions | Specific professions |
| Documentation | Agreement + business records |
Quick Reference
Jump to: ABC test, Borello, AB 2257, or documentation.
1. The ABC Test
Default post-AB 5: worker is employee unless A, B, and C all met.
If this is you: Default employee classification. Burden on employer to establish: (A) freedom from control, (B) outside usual business, (C) customarily engaged in independent business. All three required.
ABC Test Strategy
- Document control freedom.
- Show work outside usual business.
- Document independent business status.
- Professional licensing evidence.
- Multiple clients evidence.
2. Borello Multi-Factor Test
Borello test (pre-AB 5) still applies to specific exempt professions.
If this is you: Relationship qualifies for Borello exemption. Multi-factor analysis — right to control, integration, profit/loss, skill, permanence, etc.
3. AB 2257 Exemptions
Specific professions and industries exempt from ABC test.
If this is you: Profession on AB 2257 exemption list — accountants, marketing professionals, certain translators, specific construction trades. Borello test applies instead.
4. Contractor Documentation
Contemporaneous evidence supports contractor status.
If this is you: Preserve contractor agreements, business license records, invoicing, marketing to other clients, professional insurance. Documentation compounds.
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IC Audit Document Lookup
| Document | Purpose |
|---|---|
| Contractor agreement | Scope and independence documentation |
| 1099-NEC issued | Payment records |
| Business license records | Independent business evidence |
| CUIC §621 | ABC test statute |
| AB 2257 | Exemption statute |
| Borello v. Department of Industrial Relations | Multi-factor test |
IC Audit Statute
- 3-year assessment statute.
- 8-year for substantial understatement.
- Unlimited fraud.
- 30-day Petition.
IC Audit Outcomes
| Defense Quality | Outcome |
|---|---|
| ABC test + strong documentation | Contractor status preserved |
| AB 2257 exemption established | Borello applied; contractor likely |
| Weak documentation | Employee reclassification |
| Clear control relationship | Employee reclassification |
IC Audit Escalation
Audit Notice
DE 231 with worker classification focus.
Analysis
ABC test or Borello depending on status.
Appeal
Petition for Reassessment, CUIAB.
First 48 Hours
- Compile contractor agreements.
- Identify exemptions.
- Apply ABC test.
- Document independent business status.
- Engage counsel.
★Brotman Law defends California contractor audits. Based in San Diego.
The ROI Question
Contractor reclassification produces six-figure assessments. Professional defense under ABC test typically recovers material amounts.
EDD Payroll Tax Audit on the Way?
California EDD audits typically focus on worker classification — whether your independent contractors should have been treated as employees. The stakes go beyond back payroll taxes: penalties, interest, and potential personal liability for responsible parties. If you’ve received an audit notice or you’re in the middle of one, the response strategy matters.
Discuss My EDD Payroll Audit → Or call: (619) 378-3138
When to Engage
- EDD contractor audit.
- 1099 recipients questioned.
- AB 2257 exemption analysis.
- Multi-year contractor relationships.
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Guide Chapters
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Frequently Asked Questions
What happens in a California contractor audit?
EDD reviews worker classification. ABC test default, Borello for exemptions, AB 2257 specific exemptions. Focus on whether 1099 contractors should have been W-2 employees. Reclassification produces retroactive payroll tax assessment.
What is the ABC test?
Worker is employee unless all three met: (A) free from control, (B) work outside usual course of hiring entity’s business, (C) customarily engaged in independent trade. Adopted by AB 5 (2019). Strict presumption of employee status.
What is AB 2257?
California law (2020) adding specific exemptions from ABC test. Professional services, creative professionals, specific trades, and referral agencies. Exempt categories use Borello multi-factor test.
What is the Borello test?
Multi-factor common law test for worker classification. Right to control, integration into business, permanence, skill required, profit/loss opportunity. Used for AB 2257 exemptions and specific situations.
How do I prove independent contractor status?
Documentation: written contractor agreement, business license, independent marketing, multiple clients, professional liability insurance, own equipment, no integration into hiring entity’s business. Multiple indicia establish contractor status.
What happens if EDD reclassifies contractors?
Retroactive payroll tax assessment (UI, ETT, SDI, PIT withholding). Penalties. Interest. Assessment can be multiple years. Federal IRS liability may follow.
Can I appeal IC reclassification?
Yes. Petition for Reassessment within 30 days. CUIAB hearing. Evidence of contractor status. Expert representation useful for complex cases.
Which professions are AB 2257 exempt?
Extensive list. Insurance agents, accountants, marketing professionals, real estate agents, physicians, lawyers, cosmetologists with booth rental, translators, specific construction trades, business-to-business contractors under specific conditions.
Do 1099s alone make someone a contractor?
No. Issuing a 1099 does not determine status. Employer intent is not controlling. ABC test (or Borello for exemptions) is the legal standard. 1099 with employee-like relationship risks reclassification.
Can I use the Borello test post-AB 5?
Only for AB 2257-exempt relationships. For non-exempt, the ABC test applies. Using Borello where ABC applies fails the classification defense.
What penalties apply to misclassification?
Payroll tax (UI, ETT, SDI, PIT). Negligence (10%) or intentional (up to 50%) penalties. Interest. Additional civil penalties for willful misclassification under Labor Code.
Does federal law align with California?
Different tests. IRS uses multi-factor common law test. California applies ABC test post-AB 5. Worker can be IC for federal but employee for California. Coordinated analysis required.
Can I convert contractors to employees going forward?
Yes. Prospective classification change is available. Retroactive periods may still face EDD reclassification audit. Voluntary reclassification paired with compliance program is a common defensive move.
Next Steps
Contractor audit? 15-min consultation free.
- ABC test: CUIC §621; AB 5 / AB 2257.
- Tests drawn from California statutes and case law.
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