Contractors

Responsible Person Liability for California Contractors and Construction Companies

When your company falls behind on payroll or sales taxes, the state can come after you personally.

California’s construction industry runs on tight deadlines, tight margins, and constant cash flow challenges. Many contractors juggle payroll, materials, and subcontractors, often relying on short-term financing or delayed payments from clients. When taxes fall behind—especially payroll or sales and use taxes—the California Department of Tax and Fee Administration (CDTFA) and Employment Development Department (EDD) don’t stop with the business. They often pursue the individuals behind the company under California’s Responsible Person Liability laws.

If you’ve received a CDTFA Dual Determination Notice, an EDD Personal Assessment, or a Notice of Determination, the state is alleging that you—not just your company—owe the unpaid tax balance.

How Responsible Person Liability Works

When a construction company fails to remit sales tax on materials or payroll tax withholdings, the CDTFA or EDD will investigate who had control over the company’s finances. That can include corporate officers, managing members, project managers, controllers, or payroll supervisors. The agency doesn’t need to prove bad intent; it only needs to show that you had the authority to pay and didn’t. Once designated a “responsible person,” you can be personally assessed for the full amount of unpaid tax, plus penalties and interest.

Why Contractors Are Targeted

Construction companies are among the most frequently audited industries in California. The reasons are simple:

• Entity turnover and dissolutions – Many contractors operate under short-term LLCs or DBAs, which dissolve or change names after each major project.
• Subcontractor confusion – Misclassifying workers as independent contractors exposes owners to EDD payroll assessments.
• Use tax exposure – Failing to pay use tax on materials consumed during jobs often triggers CDTFA audits.
• Cash-flow delays – When receivables lag, some companies “borrow” withheld or collected taxes to pay vendors, triggering liability later.

Even if your company has closed or gone bankrupt, the state can pursue you personally for debts incurred while you were in control.

Common Scenarios That Lead to Personal Liability

• The business fell behind on payroll tax remittances or EDD filings.
• You were listed as a managing member, CFO, or signer on the company’s bank accounts.
• Subcontractor misclassification resulted in back payroll taxes.
• You purchased materials out of state and failed to report use tax.
• The company dissolved, leaving unpaid sales or payroll tax balances.

How to Protect Yourself

If you’ve received a CDTFA or EDD notice, act immediately:

1. Don’t ignore it. Each notice carries strict appeal and protest deadlines.
2. Gather records. Show who actually made financial and payroll decisions.
3. Separate roles and accounts. Make sure your personal finances are not intertwined with the business.
4. Hire experienced legal counsel. These cases often involve overlapping tax agencies and complex factual issues.

Defending California Contractors from Personal Liability

Attorney Steve Baghoomian has spent over a decade defending California business owners and managers from CDTFA and EDD assessments. He understands how construction companies operate—and how easily responsibility can shift to individuals when a project runs into financial trouble.

Whether the issue involves sales and use tax, payroll tax, or employee classification, Steve’s goal is clear:
to prevent the state from turning a struggling construction company’s tax debt into a personal financial disaster.

If you’ve received a responsible person notice or suspect you’re being targeted by the CDTFA or EDD, contact Baghoomian Law for a confidential consultation. Protect your livelihood before the state decides you’re the one responsible.