EDD Audit Penalties and Interest: What Can California Employers Be Assessed?

By Marc Boulanger, CPA

An EDD payroll tax audit can result in more than additional tax. Depending on what EDD determines during the examination, an assessment may also include penalties and interest.

There is not one standard penalty that applies to every EDD audit. California's employment tax laws contain different penalties for different failures, and understanding exactly why a penalty was assessed is an important part of reviewing an EDD assessment.

Is There a Standard EDD Audit Penalty?

No.

An EDD audit itself does not create one universal penalty percentage.

EDD publishes a Penalty Reference Chart identifying numerous penalties under the California Unemployment Insurance Code. The applicable penalty depends on what occurred.

For example, penalties can arise from issues involving late payroll tax payments, delinquent returns, wage reporting, electronic filing requirements, worker information reporting, or other failures addressed by the California Unemployment Insurance Code.

Tax, Penalties and Interest Are Different Parts of the Assessment

When reviewing an EDD assessment, I generally separate the balance into:

• Tax resulting from the audit adjustment
• Penalties imposed under specific provisions of California law
• Interest accruing on overdue amounts

These components should not automatically be treated as one number. There may be different arguments concerning each component.

What Is the Penalty for Late California Payroll Tax Payments?

EDD currently states that late payroll tax payments are subject to a 15% penalty plus interest.

That can become relevant when an audit determines that payroll taxes should have been paid for earlier periods.

However, an audit assessment can contain other penalties as well. The specific notice and assessment schedules should be reviewed to determine exactly which penalty provisions EDD applied.

Can EDD Assess Payroll Reporting Penalties?

Yes. California law contains penalties involving payroll tax returns, wage reports, worker information returns, and other reporting obligations.

The amount and method of calculating the penalty depend on the particular requirement that EDD says was violated.

This is another reason I would identify the specific penalty on the assessment rather than simply describing the entire balance as an EDD penalty.

Are There Penalties for E-Filing and E-Payment Problems?

Yes. California generally requires employers to electronically file employment tax returns and wage reports and electronically submit payroll tax deposits unless an approved waiver applies.

EDD currently lists separate noncompliance penalties for tax returns, wage reports, and payments that should have been submitted electronically.

What About Penalties in an Independent Contractor Audit?

If EDD determines that workers treated as independent contractors should have been employees, the Department may calculate employment taxes for the affected periods and determine whether penalties apply under the circumstances.

The first step should be understanding the underlying classification determination.

If the worker-classification determination is incorrect, that can affect the tax assessment on which related amounts are based.

See our EDD Independent Contractor Audit Guide.

How Does EDD Interest Work?

EDD charges interest on overdue payroll taxes, including Unemployment Insurance, Employment Training Tax, State Disability Insurance, and Personal Income Tax withholding.

EDD adjusts its interest rate twice each year based on short-term federal rates, with rate periods beginning in January and July.

For July 1 through December 31, 2026, EDD lists the interest rate on overdue taxes as 7%.

Does EDD Interest Compound?

Yes.

EDD states that interest is compounded daily on unpaid tax, interest, and certain penalties.

That means the amount can continue increasing while an assessment remains unpaid.

Can EDD Waive Interest?

EDD states that the California Unemployment Insurance Code does not allow the Department to waive or cancel interest.

This is important because penalty relief and interest are not the same issue.

An employer may have an argument concerning a penalty while interest continues to apply to overdue amounts under California law.

Can an EDD Penalty Be Waived?

Some EDD penalties contain an exception based on good cause or reasonable cause, while other penalties do not provide the same relief.

EDD's Penalty Reference Chart identifies whether an exception applies to a particular penalty and refers employers to EDD's Waiver of Penalty Policy for additional guidance.

Therefore, the right question is not simply, "Can EDD penalties be waived?" It is:

Which penalty was assessed, and does California law provide a basis for relief from that particular penalty?

What Should You Review Before Requesting Penalty Relief?

Before requesting penalty relief, I want to understand:

• The specific penalty assessed
• The California Unemployment Insurance Code provision involved
• Why EDD says the penalty applies
• How EDD calculated the penalty
• Whether the underlying tax assessment is correct
• Whether that particular penalty permits an exception
• The facts supporting any available good-cause or reasonable-cause argument
• Whether the employer has documentation supporting those facts

What if the Underlying Audit Assessment Is Wrong?

Penalty review should not distract from the underlying audit determination.

If EDD incorrectly classified workers, included payments that should not have been treated as wages, or made errors in calculating the assessment, the underlying liability may need to be challenged.

See: How to Challenge an EDD Audit Assessment

Does Interest Continue During an EDD Appeal?

Filing a Petition for Reassessment does not suspend the accrual of interest on the assessed amount.

That creates an important financial consideration when deciding whether to leave a disputed assessment unpaid while the petition proceeds.

See our EDD Petition for Reassessment Guide.

Can You Pay the Assessment to Stop Additional Interest?

An employer may choose to pay a disputed assessment while continuing to challenge it.

EDD's published petition guidance explains that paying the disputed amount is not an admission that the liability is correct. When payment is made after a Petition for Reassessment has been filed, the dispute can proceed as a refund matter.

Whether that makes financial sense depends on the amount involved, expected duration of the dispute, available cash, and other circumstances.

What I Look at When Reviewing EDD Penalties and Interest

I do not begin by assuming every amount on an assessment should be challenged.

Instead, I want to reconstruct the assessment:

• What additional tax did EDD determine?
• What audit adjustment created that tax?
• Which penalties were added?
• What statutory provisions support those penalties?
• Were the penalties calculated correctly?
• Does an exception apply to any of them?
• How much interest has accrued?
• Is interest continuing to accrue?
• Is the underlying assessment itself disputed?

That separates legitimate disputes from amounts that may simply be consequences of an otherwise correct liability.

EDD Penalties and Interest FAQs

Is there a standard penalty for an EDD audit?

No. California has different employment tax penalties for different violations. The applicable penalty depends on the specific issue identified by EDD.

What is the penalty for a late California payroll tax payment?

EDD currently states that late payroll tax payments are subject to a 15% penalty plus interest.

What is the current EDD interest rate?

For July 1 through December 31, 2026, EDD lists the interest rate on overdue payroll taxes as 7%. EDD adjusts the rate twice each year, so the current rate should always be verified.

Does EDD interest compound?

Yes. EDD states that interest is compounded daily on unpaid tax, interest, and certain penalties.

Can EDD waive interest?

EDD states that the California Unemployment Insurance Code does not permit the Department to waive or cancel interest.

Can EDD penalties be waived?

Some penalties may have a good-cause or reasonable-cause exception, while others do not. The specific penalty and applicable California law must be reviewed to determine whether relief is available.