Businesses must meet federal, state, and local tax obligations. These rules and laws are not always easy to navigate. Violations are common and can quickly lead to harsh financial penalties. In some cases, particularly if the taxing authority can establish that there was intent behind a failure to pay these taxes, criminal penalties can certainly be on the horizon. Remember that liability for employment taxes is not left only to the company, but also the “responsible party”—the person who knew or should have known about the obligation and failed to make payment.
Business owners can mitigate this risk by getting in front of their employment tax obligations which includes building awareness of the more common violations. The following will briefly discuss the five most common types of non-compliance for employment taxes so your business can avoid becoming victim to the same mistakes.
#1: Not paying on time
Also referred to as pyramiding, this form of non-compliance occurs when an employer withholds employment taxes but fails to remit payment to the IRS. As the obligation arises shortly after payroll is remitted, these balances can add up fast. And the government is not particularly happy as much of the money failing to be paid is from the employees’ wages. Hence, this can quickly lead to an overwhelming tax bill.
#2: Not checking up on PSP
It is common for business owners to hire a payroll service provider (PSP) and other similar third-parties to assist with the calculation, filing and possibly the payment of employment taxes. This is a convenient option and delegation for business owners choosing to focus on other elements of their business. When doing so, the business then expects the hired entity (company, accounting firm, etc.) to file and sometimes pay employment taxes on their behalf.
It is important that the business and the third party are clear on the services being provided as although these services are helpful, the IRS will still hold the business and the “responsible parties” liable should there be a failure to file and/or make the employment tax payments.
Mitigate this risk by verifying the provider is making the agreed-upon payments and filings.
#3: Not paying for offshore employee leasing
Having an offshore team can help to expand business operations. Those who offer these services may claim that employment taxes are not due, but the IRS has recognized this practice as an abuse in the past and generally expects employment taxes on the “deferred” compensation paid for these services. Be clear on the respective roles of each entity and person working for you.
#4: Employee classification
Having an offshore team can help to expand business operations. Those who offer these services may claim that employment taxes are not due, but the IRS has recognized this practice as an abuse in the past and generally expects employment taxes on the “deferred” compensation paid for these services. Be clear on the respective roles of each entity and person working for you is evolving.
If your worker is determined to have been an employee, the IRS will allocate back employment taxes causing increases in amounts owed by the company. If you are concerned about the classification of your workers, there are voluntary disclosure programs available.
Keep up to date on the strictest test used in your area to better ensure compliance
#5: Improper TIN
The IRS expects businesses to have a proper taxpayer identification number (TIN) for each of its workers. This is generally a Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN). The business is expected for every worker it hires to be legally allowed to work in the US and that the correct SSN/ITIN matches the worker’s name. Failure to provide accurate SSN/ITIN will often result in the denying the business the expense of paying said worker(s) and thereby increase the overall taxable income of the company.
Other forms of non-compliance
Additional forms of non-compliance can include failing to take out the proper employment tax when businesses pay employees in cash as well as improper use of the Paycheck Protection Program (PPP) loan program. The government has gone after businesses for tax fraud if they believe businesses are using false information to take advantage of this program.
The government is aggressive when it chooses to pursue a business for a failure to comply with employment tax laws. Taxing authorities have various legal remedies at their disposal including the ability to seize business assets and pursue criminal charges. It is important to take equally aggressive action to defend your business interests and better ensure your rights are protected.
The IRS is intensifying its efforts to enforce civil and criminal actions against taxpayers who do not timely withhold, pay and file their taxes. Failing to comply can result in substantial penalties and interest, which can have a major impact on the survival of a business.
To prevent or minimize tax penalties, tax professionals and advisors need a comprehensive knowledge of these regulations and the strategies that can be employed to minimize penalties or sometimes avoid them altogether.