Employment taxes can be challenging to navigate, and even the most experienced business owners can make costly mistakes that expose them to penalties and fines. Here are some common employment tax mistakes and how to avoid them.
Misclassifying Employees as Independent Contractors
It is essential to distinguish between employees and independent contractors since they are taxed differently. To avoid this mistake, it’s a good idea to familiarize yourself with the guidelines set by the IRS to determine whether a worker should be considered an employee or an independent contractor. The IRS uses a three-factor test:
- Behavioral control: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial control: Are the business aspects of the worker’s job controlled by the payer? This includes things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
- Type of relationship: Are there written contracts or employee-type benefits such as a pension plan, insurance, vacation pay, etc.? Will the relationship continue and is the work performed a key aspect of the business?
Keep in mind that if you classify an employee as an independent contractor with no reasonable basis for doing so, you can be held liable for employment taxes for that worker.
Failing to Withhold Taxes
Employers must withhold multiple federal and state payroll taxes from employee wages that include:
- Federal and state income taxes
- FICA taxes, i.e., Social Security and Medicare taxes
- State unemployment taxes
- Federal unemployment taxes
Failure to withhold taxes can result in penalties and interest charges. To avoid this mistake, be sure to calculate and withhold the correct amount of taxes from each paycheck.
Not Keeping Accurate Records
Employers are required to keep accurate records of their employees’ wages, taxes withheld, and other employment-related information. Failure to keep these records can result in penalties and fines. To avoid this mistake, set up a system to keep track of all employment-related information.
Missing Deadlines
Employers must meet certain deadlines for filing tax forms and making tax payments. Missing these deadlines can result in penalties and interest charges. Mark important dates on your calendar and set reminders to avoid this mistake.
Failing to File Form 941
Employers are required to file Form 941, the Employer’s Quarterly Federal Tax Return, to report wages, tips, and taxes withheld for each quarter. Failure to file this form can result in penalties and fines. To avoid this mistake, make sure you file the form on time and accurately report all information.
Other Important Issues to Keep in Mind
In addition to these common employment tax mistakes, there are other tax-related issues that employers should be aware of, such as the Affordable Care Act (ACA) and state-specific tax requirements.
Under the ACA, employers with 50 or more full-time employees must offer affordable health insurance coverage to their employees or face penalties. Employers must also report information about the health insurance coverage they offer to their employees on Form 1095-C.
State-specific tax requirements vary by state, so it is important to understand the tax laws and regulations in the states where you have employees. For example, some states require employers to withhold state income taxes, while others do not. Some states also require employers to register with the state tax agency and file regular tax reports.
By avoiding these common employment tax mistakes, you can save yourself time, money, and stress. In addition, it is important to stay up-to-date with tax laws and regulations to ensure compliance and avoid penalties.
Contact a Knowledgeable Business Tax Attorney Today
Kundra & Associates has been a trusted source of tax guidance for a variety of companies for more than three decades. Serving clients in Bethesda, Arlington, Rockville, Alexandria, and Washington D.C., as well as around the world, we provide clear and effective advice on policies and procedures aimed at avoiding tax mistakes and other issues. To leverage our wealth of experience and knowledge, please feel free to get in touch with us online or give us a call at 301-597-4975.
