Ask The California Employment Tax And Payroll Tax Attorney – Abating The Personal Income Tax (P.i.t.) Portion From An Edd Assessment

By Robert S. Schriebman

2023

Introduction

The typical EDD Notice of Assessment (NA) is composed of 4 separate categories of employment and withholding taxes as follows:

• Unemployment Insurance Tax (UI)
• State Disability Income Tax (SDI)
• Employment Training Tax (ETT)
• Personal Income Tax (PIT)

It is also common for the EDD to assess one or more of their arsenals of penalties. For example, the most common penalty is the 15% negligence penalty set forth in CUIC § 1127.

In addition to the several layers of taxes and penalties, the EDD also assesses interest on the tax and penalty portions.

This article will discuss several ways to reduce or remove completely the Personal Income Tax portion of the assessment together with interest thereon.

Recalculation of the PIT Portion Based on a Worker’s W4 Form

The PIT portion is assessed by the EDD at a flat rate of 6% of wages paid or payment for outside services reclassified by the auditor as taxable compensation. For employees, it may be possible, using internal W4 Forms, to recalculate the 6% PIT portion based upon the filing status and the number of allowable exemptions set forth on the W4 Form. The California tax withholding table can be found in EDD Publication DE 44, California Employer’s Guide for the years set forth in the NA. However, since reclassified independent contractors do not prepare W4 Forms the recalculation is not available for them.

Recalculation of the PIT Portion Using Single Zero (SO) Allowance

An employer may not have sufficient W4 Forms. This primarily occurs when workers, treated as independent contractors, have been reclassified by the EDD auditor as common law employees. Reclassified compensation is assessed at 6% for the PIT portion. The employer may use a filing status of Single with zero allowance to recalculate the PIT. This is known as single zero. This may reduce the assessment below the auditor’s estimation or projection. The single zero allowance usually requires a completed worksheet for each worker assessed. Having said this, my experience has been to request that the auditor or his/her supervisor reduce the PIT calculation down to single zero without submitting worksheets.

Using the DE 938P Form

The 938P Form has been available to employers for decades and has remained essentially unchanged other than the removal of carbon paper between the copies. These days, the auditor prepares a good portion of the 938P Form and then submits it to the employer for completion. This is a two-part form, divided down the middle. The left-hand side is for the employer to complete, sign and date. The right-hand side is for the employee who is required to report only FTB wages and quarterly estimated tax payments if any. The form also requires the employee to set forth only the FTB taxes paid for the specific years in issue. The form must be signed and dated by the employee. The form can be confusing, and one would be wise to consult a professional who has had experience completing and filing the forms. The forms are submitted to the FTB by the EDD, and is verified, the PIT portion for the specific employee is removed from the assessment.

The DE 6028P Form

The DE 6028P Form, Declaration, has been in use by the EDD since 2010. It is a one-page form prepared under the penalty of perjury and is completed and signed by the employer. The form has check boxes for 1099s, W2s, and K1 distributions for the specific years in issue. The form is very efficient, and if properly prepared, is used by the auditor to reduce or even eliminate the PIT portion. The completed form should be sent to the auditor or the auditor’s supervisor.

EDD Penalties Are Not Proportionately Abated

There is an old EDD law on the books that states, in substance, that even though the PIT portion has been partially or wholly abated, penalties assessed on the original PIT portion will not be proportionally abated. In other words, if the negligence penalty on the PIT portion was $1000, but the PIT portion has been wholly abated by the auditor, the employer is still assessed the full $1000 penalty! But this is a statute; it is not EDD policy.

Conclusion

In my opinion, the penalty statute discussed above is unconstitutional and a form of theft plain and simple. I hope one day a member of the State Legislature will introduce a bill to abolish this statute.

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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 50 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.

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