Running payroll is routine; the penalties for mishandling it are anything but. Each year, the IRS & EDD zeroes in on unpaid or late payroll taxes & withholding, piling on civil penalties, interest, and fines that can snowball until a healthy small business buckles under an unpayable balance.
The Shock: California Hits First and Asks Questions Later
If you miss one Employment Development Department (EDD) payroll-tax deposit, the California state will instantly add 15 percent of the unpaid amount, plus interest that resets every six months. A second 15 percent penalty lands if the quarterly DE 9/DE 9C report is more than 60 days late. Add a $50 e-file failure penalty or $20 per wage item for paper filings, and the liability snowballs. A $100,000 PIT-withholding quarter can balloon to $130,000 overnight—before interest, lien fees, or levy costs.
Late-deposit penalties stack even faster on the federal side: 2 percent if the payment is up to five days late, 5 percent at six-to-15 days, 10 percent beyond that, and 15 percent if the IRS issues a demand that stays unpaid after ten more days. When cash-flow problems trigger delay, interest, and penalties can bury a healthy business inside a single quarter.
But civil pain is only the beginning. If auditors decide your shortfall was willful, EDD can refer the file to the local district attorney under Unemployment Insurance Code § 2118—a felony carrying up to three years in prison per quarter. The IRS can simultaneously impose the Trust-Fund Recovery Penalty (TFRP)—100 percent of unremitted Social Security and Medicare taxes—on every “responsible person.” For truly egregious misconduct, federal prosecutors charge willful failure to remit (26 U.S.C. § 7202), a felony good for five years and a $250,000 fine per count.
If you want to stay ahead of the EDD and IRS enforcement playbook, speak with our dual-licensed tax attorneys & CPAs at the Tax Law Offices of David W. Klasing. Call (800) 681-1295 for a reduced-rate, privilege-protected case evaluation, and learn the concrete steps that keep civil problems from becoming criminal tax nightmares.
Fraud Patterns That Put You on EDD and IRS Radar
EDD and IRS no longer rely on random audits; they mine data for anomalies. The following schemes send those algorithms flashing red:
Under-the-Table Payment
Paying workers in cash to dodge withholding or liens. Regulators cross-match merchant-card totals, workers’ compensation rosters, and 1099s; if the headcount and revenue don’t align, high-risk tax audits follow.
Rate Manipulation
Shifting payroll to a newly formed or related entity to hijack a lower Unemployment-Insurance rate. EDD’s experience-rating team now back-dates rates and assesses the 15 percent penalty on every misdirected dollar.
Failure to Report Wages
Dual systems—official wages on the books, overtime, or bonuses in cash—create phantom liabilities when cross-referenced to bank deposits or time-clock apps.
Falsified Returns
DE 9/DE 9C filings showing conveniently round totals or implausibly low PIT can signal fabricated numbers. Once falsification is proven, “honest mistake” defenses vanish.
Employee Misclassification
Labeling actual employees as independent contractors to avoid payroll taxes. If the State finds the misclassification was deliberate, it layers $5,000–$15,000 per worker onto federal fines—and $10,000–$25,000 if the pattern is repeated.
The Civil and Criminal Tax Penalty Cascade: From Late Deposits to Felony Charges
EDD and IRS penalties do not stop at late-payment percentages. Once an audit proves you failed to collect and remit, failed to file, failed to deposit, or filed false information returns, a dense stack of federal statutes ignites.
Failure to Withhold and Pay (IRC § 3403)
Even if you never collected the cash from employees, you remain liable for every cent—plus interest—and the IRS can pierce the corporate veil to seize personal assets. Bankruptcy rarely helps; the Supreme Court treats these liabilities as nondischargeable “taxes.”
Willful Non-Filing (IRC § 7203)
Penalties run five percent of the unpaid tax per month, up to 25 percent, plus a $25,000 fine ($100,000 for corporations) and potential one-year imprisonment if the government proves willfulness. Elevate the conduct to evasion (IRC § 7201), and fines jump to $100,000 ($500,000 corporately) and five years behind bars.
Late Deposits (IRC § 6656)
Two, five, ten, and fifteen-percent federal surcharges stack according to days overdue, mirroring California’s 15 percent hit.
Faulty Information Returns (IRC § 6721)
Missing, incomplete, or incorrect W-2s trigger tiered penalties that can reach $250,000 per year for large employers.
Fraudulent Wage Statements (IRC §§ 6674 & 7204)
Each fake W-2 brings a $50 civil penalty, a $1,000 criminal fine, and up to one year in jail.
Employees are not immune. Filing a fraudulent W-4 or refusing to supply a valid TIN invites its own civil fines (IRC § 6682) and misdemeanor charges (IRC § 7205).
On the California side, deliberate employee misclassification piles on $5,000–$15,000 per worker—$10,000–$25,000 for repeat conduct—plus separate penalties for failing to issue wage statements or carry workers’-comp. If a misclassified worker is injured on the job, the owner can be personally liable for medical costs normally covered by insurance. EDD can seize personal homes to satisfy these debts, and bankruptcy provides no escape.
Worker Classification: A Needle You Must Thread Correctly
Worker misclassification now tops EDD & IRS audit agendas: treat bona-fide employees as independent contractors, and you inherit their entire unpaid federal tax liability, $5,000 per worker in federal fines, 1.5 percent of unpaid income tax, and 20 percent of uncollected Social-Security withholdings—before California’s separate $5,000–$25,000 hits. The agency cross-checks 1099-NEC filings, workers’-comp rosters, and wage-claim data to catch dual systems.
You can ask the government for a ruling, but that step is a double-edged sword: one wrong fact or skewed submission, and you lock in liability. Our dual-licensed attorneys and CPAs prepare ruling requests only after a privilege-protected forensic review to ensure the narrative cannot boomerang.
At the tax law offices of David W. Klasing, our employment tax & worker classification audit defense is built to shield you at every turn. We’ll handle EDD or IRS notices, reconcile and present your records, and strategically manage each stage to prevent inadvertent disclosures or the audit net from widening across multiple years or affiliated entities. When eligible, we navigate you into voluntary relief avenues such as the Voluntary Classification Settlement Program (VCSP), carefully weighing penalty savings against the risk of exposing sensitive details. And if federal agents pursue criminal counts—like willful failure to collect or remit (26 U.S.C. § 7202), false statements (§ 7206), or tax evasion (§ 7201)—we stand ready to protect your constitutional rights with aggressive, privilege-protected advocacy.
Contact the Tax Law Offices of David W. Klasing If You Are Worried About IRS or California Payroll-Tax Penalties
At the Tax Law Offices of David W. Klasing, we take the stress and guesswork out of payroll-tax problems. Employment-tax rules are brutally complex, and a single misstep—late deposits, worker misclassification, unfiled returns—can trigger 15 percent California penalties, a 100 percent federal Trust-Fund Recovery assessment, and even felony charges. Most lawyers have never touched this intersection of tax and criminal law, but our dual-licensed (Attorney & CPA) team has spent decades fixing these cases precisely. We review your records under attorney-client privilege, calculate every exposure, and—where possible—guide you into California state and federal voluntary-disclosure programs that typically eliminate criminal risk and cap civil tax penalties. If disclosure is no longer an option, we pivot to damage control, negotiate manageable payment terms, and defend your constitutional rights if investigators press charges.
Because we handle every phase in-house—legal strategy, forensic accounting, Kovel-protected bookkeeping cleanup—you won’t bounce between multiple firms or risk leaks that prosecutors can exploit. Our goal is simple: keep the matter civil, slash penalties where statute allows and structure repayment you can actually afford so the business survives and you keep your freedom. If you suspect a payroll-tax issue, call (800) 681-1295 or book online for a reduced-rate, privilege-protected consultation before the IRS or EDD makes the first move.
