EDD Requires Escrow Holdback for California Business Sales
EDD Requires Escrow Holdback for California Business Sales
When you buy a California business with employees, the Employment Development Department may require an escrow holdback to cover the seller’s unpaid payroll tax liability. The buyer is responsible if the seller does not pay.
California business buyers often focus on the purchase price, the assets, and the customer list. They forget about the seller’s payroll tax obligations. The Employment Development Department has broad authority to collect unpaid payroll taxes from the buyer of a business. This is why EDD requires an escrow holdback in many business sales. At Secured Trust Escrow, we structure business sale escrows that account for EDD liability and protect buyers from surprise tax bills.
Step 1: The Buyer Requests EDD Clearance
Before closing, the buyer or escrow company requests a Certificate of Release of Buyer from the EDD. This certificate confirms that the seller has paid all payroll taxes or that the buyer is not liable for the seller’s debts. If EDD does not issue the certificate, the buyer must hold back funds in escrow.
Step 2: Escrow Holds Back Sufficient Funds
The escrow instructions specify an EDD holdback amount. This amount must be sufficient to cover all amounts the seller owes to the EDD, up to the total purchase price. The holdback stays in escrow until the EDD issues the Certificate of Release or until the statutory period expires.
Step 3: EDD Reviews and Responds
EDD reviews the seller’s account and determines whether any taxes are owed. If the seller is current, EDD issues the certificate and the escrow company releases the holdback to the seller. If taxes are owed, EDD notifies the escrow company of the amount due. The escrow company pays EDD from the holdback and releases any remainder to the seller.
Step 4: Final Release or Payment
Once EDD clears the seller or the holdback has been used to pay the debt, the escrow company closes the holdback portion of the account. The buyer receives the certificate. The seller receives the net proceeds. The transaction is complete and the buyer is protected from future EDD claims related to the seller’s employment taxes.
Note: EDD holdback requirements can vary based on the transaction structure and the seller’s history. Buyers should consult with their attorney and escrow officer to determine the appropriate holdback amount for their specific deal.
Business Sale Escrow with EDD Protection
Secured Trust Escrow structures business sale escrows with EDD holdbacks for transactions throughout California.
About the Author: This guide was prepared by the escrow officers at Secured Trust Escrow, a California DFPI-licensed escrow company with experience in business holding escrow, relocation escrow, liquor license transfers, and mergers and acquisitions throughout Los Angeles, Torrance, and surrounding areas.
Legal and Regulatory Disclaimer: This article provides educational information about escrow services. It does not constitute legal, tax, or investment advice. Escrow transactions involve complex legal and financial consequences that vary by transaction type and individual circumstances. Parties should consult with qualified attorneys and tax professionals regarding their particular transactions. California regulations and market conditions change periodically. Last reviewed: July 2026.
