Colorado Unemployment Audits
The Colorado Department of Labor & Employment has an audit division that is tasked with insuring all employers are properly reporting wages to the agency. If you've been selected for a UI Audit, you will receive a letter in the mail like this:
UI Audits are generally random, but they could also be initiated by an individual that believes they should be classified as an employee or submitted a claim for benefits. The auditor can explain whether or not your selection was random. You should reach out to the auditor listed on the notice to confirm the date and time of the audit works for you.
The State UI Auditor will be seeking to ensure employers have:
1. properly reported all wages paid to employees to the agency & returns properly filed
2. properly classified workers as employees by scrutinizing the independent contractors you paid. They will do so by reviewing your bank statements, 1099 copies and other accounting files.
The first item is rarely an issue so as long as all wages were reported to ASAP for payroll processing. In fact, with your permission we can share with the auditor all the payroll related files they requested prior to their arrival. This will speed up things on the day of the audit. The other files listed on the notice will have to come from your accounting files (if you are not subscribed to one of our accounting packages).
The second item is where employers need to spend their time preparing. If for instance you pay any individuals as 1099's, you will need to make this your focus and gather together any supporting documentation that can show that the individual is free from control and engaged in performing/selling/marketing his/her services to others. Here is a help article we wrote on classification issues to help you determine if you properly classified your contractors. The burden will be on you to show they are not employees. Items to help your case would be written contracts, contractor's invoices, contractor's marketing materials, contractor's business card, and a contractor's formal proposal for services. You might also search the Sec. of State's database to see if any individuals have registered a trade name with the agency; this could help show that while they may be an individual person they offer their services and operate as a business.
The burden is high; temporary help/casual labor generally will not meet the contractor standards. If your exposure is significant, we suggest you contact a law firm experienced in Classification Issues. We have crafted this help article and others as a starting point, but in the end an experienced HR lawyer would be best as this item falls more on the legal side than tax side. Here are two firms we recommend to Colorado employers:
Bechtel & Santo
Jennifer L. Gokenbach, Esq.
Gokenbach Law, LLC
Here is blog post from Jennifer’s website detailing the issue in Colorado.
Audit Process: https://www.colorado.gov/pacific/cdle/audit-process
Ensure Proper Worker Classification: https://www.colorado.gov/pacific/cdle/ensure-proper-worker-classification
Independent Contractors: https://www.colorado.gov/pacific/cdle/independent-contractors