There are numerous types of payroll taxes that an employer must withhold from their employees’ paychecks or pay to the government. These payroll taxes may include the following:
- Social Security
- Medicare (FICA)
- Federal income tax withholding
Each of these payroll taxes may have their own legal issues attached. Typically, the employer is the one who has the legal responsibility to withhold these taxes and pay them to the government. The failure to properly pay them could lead to drastic consequences for a business that can include back taxes and penalties, including possible jail terms.
Therefore, it is vital that you are fully aware of how each of these taxes work and how to comply with IRS laws and regulations. Speak with a tax attorney at The Thorgood Law Firm today about any questions or concerns.
How Are Payroll Taxes Withheld?
The employee is not responsible for paying their own payroll taxes. The employer makes regular deposits into an account with the IRS. These payments are made on a set schedule. In addition to making the payments, the employer must complete the Form 941 on a quarterly basis and file it with the IRS. The employer reports the payroll tax withholding to the employee as part of the annual W-2 filing.
How Mistakes Can Lead to Payroll Tax Problems
Employers can make mistakes in a number of ways that can cause them legal problems. For example, they could do the following:
- Improperly classifying workers as independent contractors, wrongfully shifting the burden onto the employee to pay these taxes on their own
- Make a mistake in making the appropriate tax withholding, causing tax issues for the employee, who will have to pay these taxes (the employer may be penalized for this mistake)
- Not keeping the proper documentation of the withholdings, often making it difficult for the employer to “show their work” to the IRS
- Failure to file the necessary tax forms with the IRS that evidence the withholding, or making mistakes in the paperwork
- Wrongfully using payroll taxes for business expenses, which is an illegal practice called “pyramiding.”
The Consequences of Payroll Tax Errors for a Business
Any of these expenses can have serious consequences for the employer. If they make a mistake involving their employees, it can become a recruitment and retention issue. The last thing an employee wants and needs is to get a large bill later in time for money that their employer was required to withhold.
For the employer, there are financial risks involved with payroll tax mistakes. Not only must the IRS be paid the amount that they failed to withhold, but the business owner may be subject to additional penalties on top of that. The IRS may assess the business a penalty of up to 15% for the failure to deposit money. For assessment, these penalties will compound over time if they are unpaid.
A business owner may even have personal liability for back taxes that their company owes. This situation may be one that would result in the IRS “piercing the corporate veil” and coming after the owner personally. Depending on the nature of the mistake, there may even be potential criminal consequences.
How Can a Business Proactively Work to Meet Payroll Tax Obligations?
If you are a business owner, you must develop and implement compliance strategies to properly withhold payroll taxes and stay out of trouble with the IRS. There are a number of things that you can do ahead of time to protect yourself. These measures can include the following:
- Ensuring that you understand the law on when you can classify a worker as an independent contractor and when they must be treated as an employee (which will trigger the obligation to withhold payroll taxes)
- Working with a reliable payroll systems provider (you may be unable to escape penalties, even when the provider makes a mistake, depending on the facts and circumstances of the situation)
- Developing policies and procedures for withholding payroll taxes, periodically performing tests and audits to ensure that they are being followed
- Keeping adequate records to document the payroll taxes that you have withheld and your efforts to comply with the law (these can be important when the IRS is considering penalties to assess)
- Address any payroll tax issues promptly (such as voluntarily disclosing mistakes to the IRS and correcting your own errors)
There will always be potential consequences for payroll tax mistakes. However, you can minimize some of the consequences when you have systems in place already. When the IRS is deciding whether to impose a penalty and take action against your business, it may examine the processes and systems that you have instituted as a measure of your commitment to compliance.
How Can a Tax Lawyer Help You Avoid and Deal with Payroll Tax Issues?
A tax attorney can play a valuable role in preventing payroll tax issues from occurring in the first place. They can provide you with preventative guidance that can help you institute policies and systems to keep errors from happening. If you do have a payroll tax mistake, an attorney helps you assess the gravity of the situation and the potential extent of your liability. They can communicate with the IRS in resolving any tax issues that result from the error. Then, a tax lawyer can review your policies and make any necessary amendments to prevent the mistake from repeating itself. If you are subject to enforcement action, a tax lawyer represents you during the process.
Contact a New York Tax Lawyer Today
The experienced New York tax attorneys at The Thorgood Law Firm provide comprehensive legal advice to businesses regarding all types of tax issues. We can work with you ahead of time on compliance issues, and we can represent you in any proceedings in front of the IRS. Tax issues are better addressed sooner rather than later. You can schedule a free initial consultation with a tax lawyer by contacting us through our website or by calling us today at (212) 490-0704. We work with clients throughout the United States on tax matters.
