One of the best ways for an employer to avoid tax issues is to withhold and remit payroll taxes. Improper withholding and remittance can lead to serious consequences on the part of the employer. Failure to do so can lead not only to penalties but even to criminal liability. If you’re planning to start a business, or you’re currently running a business but you’re not sure how taxes work exactly, here are some important things to remember.
Have you fallen behind on your payroll taxes? The Law Office of Jin Kim can help you mitigate penalties and interest assessed by the IRS. Call her office at (916) 299-9913 for a free consultation and take the first step toward tax resolution.
Classify Your Employees Correctly
One of the most basic things to get right as an employer is to classify your employees correctly. Many employers get into trouble with the IRS because they incorrectly classify a worker, either willfully or negligently. As a rule, workers may fall into two categories. The first classification is employees. An employer is required to withhold taxes for every worker classified as an employee. The second class of workers are independent contractors. Employers are not required to withhold taxes for independent contractors because they themselves declare it on their income and pay their own taxes.
The fact that taxes aren’t withheld for independent contractors has caused many unscrupulous employers to declare workers as independent contractors when in reality they are employees. Because of this, the IRS is extra vigilant when it comes to the classification of employees. If you want to protect yourself, make sure you declare workers properly either as employees or independent workers and have the appropriate evidence to back your claim.
Withhold Taxes Properly
Once you’ve settled the matter of classifying your workers correctly, the next thing to remember as an employer is that you have the responsibility of withholding taxes and remitting them to the government. This kind of tax is known as the payroll tax and it is withheld from the salary of the employee. The term “trust fund taxes” is also sometimes used for the amount that is withheld, because these taxes are meant to be held in trust.
Failure to withhold taxes properly is another common tax pitfall for business owners. It might be tempting not to pay Uncle Sam right away – after all, you can place the money back in the business, grow it some more, and then pay it after that, right? Wrong. This kind of thinking is dangerous and could hold you liable once the IRS gets wind of this. As a business owner, taxes should be among your priorities, if not the topmost priority, when it comes to paying bills.
On the Issue of Liability
You might be tempted to think – “So what, if the IRS finds out, I’ll just pay the penalty. I’ll make the money back in the business.” It’s understandable, especially if business is slow. However, this can also backfire against you. Liability for tax violations extends not only to penalties (including the dreaded Trust Fund Recovery Penalty) but may also include criminal liability. In short, there is a real possibility that you could be sent to jail. This usually happens when the IRS believes that you committed the violation willfully – meaning with full awareness of what you’re doing is wrong.
Liability may also attach even if you’re not the one in charge of the business’s day-to-day operations. (See our page on responsible officer liability to learn more). For example, as a partner, you may be held jointly and severally liable for the business’s tax violations even if you don’t take an active part in the business. The IRS can and will go after your personal property to satisfy a tax debt if you’re the owner or a partner in a business. Joint and several liability means that you’re liable for paying the entire amount, even if there are other proprietors or partners in the business. The IRS can go after any of you for payment of the entire tax liability.