The Audit Trigger – Unemployment Claim Filed

With corporations downsizing at a record pace, it’s inevitable that sooner or later an independent contractor will file a claim for unemployment benefits.  This is one of the easiest audit triggers that taxing authorities can follow up on.  Here’s how it works: 


Companies are required to submit quarterly reporting to the state taxing authorities on all their W2 employees paid during each calendar quarter, which includes employee’s name, social security number and the total amount paid.


Independent contractors are not employees and do not have statutory taxes withheld from their compensation, nor are they reported for state unemployment insurance purposes (SUI).  If the independent contractor files an unemployment claim, a simple cross-referencing will show that there is no match between the two.  A no match results in the following possibilities:

  1. The company failed to report the wages paid to the taxing authorities
  2. The SSN is inaccurate
  3. This individual was not a W2 employee of the company


The end result – the taxing authorities must investigate why there is a discrepancy and is required to investigate.  This mis-match can definitely trigger a worker misclassification audit.

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One thought on “The Audit Trigger – Unemployment Claim Filed

  1. In my last position (VP HR) I was the one who received the audit notice from the California EDD requesting an appointment and information on our contract workers. An IC who had no other work lined up, filed an unemployment claim and listed us as their employer. We were completely caught off-guard and I was very concerned. We immediately put together a cross-functional team (HR, Purchasing, Legal, Finance), researched the issue to forecast our potential liability. Within 60 days we were in a audit and we only had 35 active ICs on the books. The scary part was they wanted to see prior years data we did not have. More scrambling… In the end, we were lucky as we were able to provide enough info and more importantly demonstrate to the EDD we’d taken proactive steps to properly classify our ICs moving forward. By doing so we were able negotiate the fines and penalties down considerably.

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