ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – EDD PERSONAL INCOME TAX (PIT) ABATEMENT PROCEDURES – DIFFERENCES BETWEEN EDD FORMS 938P AND 6028P
By Robert S. Schriebman
A typical EDD audit assessment is composed of the following employment and withholding tax elements:
- Unemployment Insurance (UI)
- State Disability Insurance (SDI)
- Employment Training Tax (ETT)
- Personal Income Tax (PIT).
The larger amounts of these four taxes are UI and PIT. The EDD auditor will base these assessments on worker compensation paid to independent contractors that the auditor believes should have been reclassified as common law employees or W2 wage earners. It will also be based upon discrepancies between what was stated on W2s and 1099s as will be discussed below.
Of all of the four tax categories stated above, only one, the PIT, may be summarily removed by the filing of either a 938P Form (Claim for Adjustment or Refund of PIT) or a 6028P Form (PIT Abatement Declaration). This article will discuss the differences between these two forms and why the PIT is assessed by the auditor.
Why Is the Pit Portion Assessed?
The PIT portion is assessed usually on 1099 distributions that the auditor believes should have been W2 wages. However, sometimes the PIT is assessed from the auditor’s review of the check register or the general ledger for payments made to individuals where there was no W2 or 1099 issued. Additional PIT will be assessed if there are discrepancies between the amounts stated on W2s that are smaller than distributions to workers as reflected in the check register or general ledger. This also applies to discrepancies in 1099 payments. This is especially true if cash payments are found that are not reflected in either the W2s or 1099s.
It is common practice for the EDD auditor to estimate and project a PIT assessment for tax quarters for the current year. Remember that a W2 or 1099 is usually filed in January of the year following the year of compensation. For example, W2s and 1099s for 2020 will be filed in January 2021. However, the auditor will assess a PIT for 2020 quarters in an audit that is performed in 2020. The PIT will not be abated unless and until the 2020 W2s and 1099s that will be filed in 2021. It is the responsibility of the employer to send copies of these newly filed W2s and 1099s in order to secure abatements for the new year.
The EDD auditor may also assess the PIT for corporate and LLC payments on behalf of an employee or corporate officer that the auditor believes should have been reported on a W2. For example, personal expenses paid through a corporate or LLC credit card.
How Is the PIT Portion Abated?
Before going into an explanation of the differences between the 938P Form and the 6028P Form, keep in mind that the abatement can only apply to the amounts stated on filed 1099s and W2s. Additional compensation discovered by the auditor after reviewing the check register, general ledger, or cash disbursement journal, that is not reflected in either the W2s or the 1099s, will not be abated.
938P Form (Claim for Adjustment or Refund of PIT)
The 938P Form was used exclusively by the EDD prior to 2009. After 2009, the simpler 6028P Form was used primarily for PIT abatement purposes. The 938P Form is still in use today but is an exception rather than the use of the usual 6028P Form. However, in instances where the auditor finds payments and distributions that are not entirely reflected on W2s or 1099s, the employer will be required to complete and submit both 938P and 6028P Forms for complete abatement of the PIT. The 938P Form is used primarily by the worker who certifies that he/she reported the wages on his/her California state income tax return.
The 938P form is cumbersome. One form must be submitted for each worker. It is essentially a 2-part form divided into left-hand and right-hand columns. The left-hand column is reserved for the employer to report the specific wages and other compensation paid to a specific worker for up to a four-year period, quarter-by-quarter. The employer is required to sign and date the left-hand column.
The right-hand column is for the worker to complete. This part asks for the worker’s Social Security Number, name and address. The worker is required to again list his/her Social Security Number (a bit redundant). The worker is also required to put down annual and quarterly wage information. The worker must sign and date the right-hand column.
These days the EDD auditor will put down much of the basic identity information prior to submitting the 938P Form to the employer for completion. Sometimes, the auditor does not issue these forms, and it is up to the employer to request that the auditor do so. If the auditor is not responsive or cooperative, speak to his/her manager.
When the 938P Form is completed by both the employer and the employee, it is then submitted to the EDD auditor to the FTB who will approve the removal of the PIT portion. Admittedly, this is a time-consuming and cumbersome procedure.
This form cannot be used for S Corporation K1 distributions.
6028P Form (PIT Abatement Declaration)
This form is a huge improvement over the use of the 938P Form. This is basically a check-the-box form that is simple and straight-forward. This form requires a declaration under penalty of perjury that the employer issued W2s, 1099s and/or K1s for the audit years in issue, and filed them with the IRS and FTB.
The completed form once submitted to the auditor, may be abated by the auditor without having to obtain approval from the FTB.
The form will not abate the PIT assessment for distributions or payments not reflected on W2s, 1099s or K1s.
The use of the 938P Form or 6028P Form will not relieve the employer from penalties for failure to withhold PIT or from certain portions of the interest on the PIT assessment.
The 6028P Form for the current year that is not closed may be submitted for abatement after April 15th of the following year.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Web Site Article 422