Preparing for an Unemployment Insurance Tax Audit

The U.S. Department of Labor requires DEW to randomly perform UI Tax Account Audits on a percentage of South Carolina employers each year. Others are selected to verify that wages are being reported correctly or individuals are classified correctly in accordance with UI law. This requirement results in several thousand South Carolina employers being selected for a UI Tax Account Audit. The audits are conducted to ensure compliance with the provisions of the Employment and Workforce Law (Chapter 27 through 41 of Title 41 S.C. Code of Laws).

The purpose of UI audits are:

• To verify payroll is reported accurately.
• To ensure all workers are correctly classified as either employees or independent contractors.

Businesses with or without an active UI account may be selected for an audit to determine if they are a liable employer. The auditor can answer any questions regarding the UI law as it relates to reporting individuals.

Below is information that will help you best prepare for an audit.

Time Period and Duration of an Audit

The audit typically covers one calendar year. Selected employers will receive the audit notification letter and it will indicate the audit year. It may be necessary to expand to other years if issues are discovered. If so, the auditor will request records for additional years.

The length of time to conduct an audit varies significantly from employer to employer. It depends primarily upon the size of the employer, the condition of the employer's records and the number of issues encountered. Most field work performed on small-to medium-sized employers (1-50 employees) is completed in a day or less. If you are a larger employer, the field work of the audit may take longer.

Scheduling the Audit

The auditor will set the date and time of the audit. The employer will be notified by mail or phone. Audits are usually conducted Monday through Friday (excluding holidays) between the hours of 8:00 a.m. and 5:00 p.m. The auditor will try to be as flexible as possible to minimize any disruptions to business operations. Audits are normally conducted at the business; however, proper authorization audits may need to be held at the employer's accountant’s office.

The auditor or employer may reschedule the audit when unforeseen circumstances arise. Immediate notification should be given when a scheduled date cannot be kept. Requests to reschedule should be kept to a minimum.

Participation During the Audit

The business owner is not required to be present at the audit. A staff representative can be designated to work directly with the auditor. If possible, the owner should be available by phone.

An auditor can work directly with an accountant if they are an active agent on the employer’s tax account. If there is not an active agent on the account, the employer may assign an agent in SUITS or designate an agent by completing the Employer’s Authorization section of the Pre-Audit Questionnaire. The owner should be available by phone to answer questions the agent cannot.

Records Examined by the Auditor

S.C. Code Ann. Regs. 47-14 requires all employers to keep adequate records for reporting payroll. All documents used to track payroll should be provided.

Records requested for examination are listed below and in the Audit Notification letter. Any records maintained in electronic format do not need to be printed, as long as the auditor is granted access. Additional records may be requested at the time of the audit.

• General Ledger, Chart of Accounts, Master Vendor Lists, and Financial Statements;
• All Cash Disbursements Records; including Check Registers, Check Stubs, Disbursement Journals; Cancelled Checks, Petty Cash Receipts, Daily Cash Reports, etc.;
• Payroll Records for each employee, showing dates and amounts paid;
• Copies of W-2 Forms and W-3 Transmittal Form;
• Copies of 1099 Forms and 1096 Transmittal Forms (if any);
• Copies of SC UI Contribution and Wage Reports – UCE-101 and UCE-120 Forms,
• Copies of FUTA reports – 940 Form; and FICA reports – 941 Forms;
• Federal Income Tax Return – 1040 Form Schedule C, 1120, 1120S, or 1065; Profit and Loss Statement (if income tax return unavailable);
• Any other records indicating payments for services performed; and
• Source documents showing basis for non-payroll payments to individuals, such as: Invoices, Business Cards, Certificates of Insurance, Contracts, Receipts, etc.

If the records cannot be provided on the scheduled date, contact the auditor immediately. The auditor will reschedule the audit allowing the employer reasonable time to gather records.

Please click here for instructions on how to upload documents securely through our EFT portal Globalscape.

Under S.C. Code Ann. § 41-29-150 you are required to provide records to the examiner for examination. A refusal to provide records can result in a subpoena in accordance with S.C. Code Ann. § 41-29-190. Failure to comply can also result in potential civil and criminal penalties.

Payments to individuals that were not processed through the payroll system must be analyzed. The U.S. Department of Labor requires each audit to include a search for unreported wages and/or misclassified workers. These types of payments may be found when examining non-payroll records.

Independent Contractors

An individual being paid for services performed is presumed to be an employee unless facts determine the worker is an independent contractor. Determinations concerning employer-employee relationships and independent contractor relationships are based on S.C. Code Ann. Regs. 47-8 (PDF).

Results of an Audit

The examiner will discuss the preliminary results of the audit upon completion of field work. In addition, a post-audit report will be mailed when the audit has been completed. The employer can view their online account for any changes.

The auditor will contact the employer and request payment for any amounts due. The employer can make a payment electronically or by mail. If full payment cannot be made at the conclusion of the audit, a payment plan can be established. If the audit creates a credit, the employer may apply the amount to the next quarterly report or request a refund.

Decisions made based on audit findings may be appealed. Instructions for appeal are included in the post-audit report.