IRS Begins Program To Target Payroll Compliance By Small Businesses And Independent Contractors – Don’t Get Caught With Your Pants On The Ground; You Could End Up Losing Them.
Are you a small business owner? As a small business owner it is important to ensure you are properly reporting and paying your payroll taxes. There are three components to payroll taxes that you as a small business owner should be aware of.
1. Federal Insurance Contribution Act (FICA): FICA or Social Security taxes are withheld by the employer and reported to the Internal Revenue Service usually on a quarterly basis. In addition, the employer must match the amount that is owed by the taxpayer. The amounts withheld from the employee for FICA are consider held in trust for the federal government. This will be discussed more later.
2. Federal Unemployment Tax Act (FUTA): FUTA taxes are paid to the government for payment of unemployment insurance. This amount is equal to 6.2% of the employee’s wages. Although this money is to be paid by the employer, there is a credit for any unemployment taxes paid to the state, such as taxes paid the California Employment Development Department.
3. Income Tax Withholding: The third tax that must be accounted for by the employer is the employees’ income tax withholding. This amount is calculated on a scale depending on the filing status and number exemptions claimed by the employee. The employer is required by law to withhold these taxes from the employee and remit them to the government every quarter through quarterly wage withholding reporting forms. The money that is supposed to be withheld by the employer for income taxes is also considered held in trust for the government.
The FICA and Income Tax Trust Fund are deemed held by the employer and to be remitted to the federal government every quarter. The trustee of the funds is not only the employer (whether it be a corporation, partnership or sole proprietor) but also the person responsible for making the payroll. If the corporation or the person responsible for making the payroll fails to remit these funds to the government at the appropriate time, they may be held personally responsible for the funds that were not remitted. Additionally, they may be assessed a severe penalty called the trust fund recovery penalty. The trust fund recovery penalty is a severe penalty to encourage people to make their payments to the government on time. The amount of the trust fund recovery penalty is equal to 100% of the funds that were to be held in trust. In addition, the employer may be liable for failure to file and failure to pay penalties. If the under reporting is substantial enough or there is evidence of purposefully conversion of the trust funds to other business debts, the employer may be held criminally liable for fraud or tax evasion.
It is important that you as an employer be diligent in making sure you are properly withholding funds from your employees and properly remitting those funds to the federal government. It is common for clients to have opted to pay their employees as “independent contractors”. Regardless of what you label a person, if they meet the qualifications of an employee the IRS will deem that person an employee. The ramifications of having an independent contractor reclassified as an employee are dire. The IRS will take all of the payments remitted to that employee and consider them income subject to FUTA, FICA and income tax withholding. You will be held liable for failure to report those wages on your quarterly wage and income filing. Additionally, you will be held liable for not remitting FICA and FUTA payments to the service. The amounts you failed to withhold will be considered conversion of trust fund and be subject to trust fund recovery penalty. For one employee making $10 per hour this could lead to $50,000 worth of penalties and interest.
Starting on February 16th of this year, the IRS will begin a three year tax audit program focusing on employment taxes. Starting next week, 8 February, IRS Auditors around the country will be finishing specialized training on auditing payroll accounts of small business and self-employed individuals. Mary Gorman of the IRS stated that the “audits will include examination of employee/independent contractor status, executive officer compensation, and fringe benefits”. Michael Baer, 23 DTR G-1 (2010). The IRS has 6,000 planned audits to be completed in three years. That does not mean that only 6000 audits will be done. Local trends will be studied and taken into account.
As a member of Proscenium Counsel our general counsel services will provide you with the counsel on what steps to take to protect yourself from these pitfalls. In addition, you are eligible for 20 hours of audit defense and discounts on audit defense fees. The benefit of being a member of Proscenium Counsel is that we take every precaution to reduce your chances of going under audit or having an underpayment in the first place.
If you are interested in becoming a member of Proscenium Counsel and taking advantage of all the benefits it has to offer, please email Jerry Stevenson at info@stevensonlawgroup.com.