Payroll Taxes

Generally speaking, employers have a legal obligation under the IRS tax code to pay payroll taxes on behalf of their employees.  There are two types of payroll taxes that employers may be subject to: withholdings from the employee or withholding from the employer for each employee –Pay-As-You-Earn (“PAYE”) and Pay-As-You-Go (“PAYG”).    Additionally, taxes may also be paid directly from the funds of an employer on a fixed price per employee basis or based on a percentage of employee earnings.

Payroll Tax Problems

Employers who fail to properly withhold taxes for employees may be penalized by the IRS and are subject to the charge imposed by the Trust Fund Recovery Penalty, as assessed by the IRS.  The Trust Fund Recovery Penalty is assessed to employers after they are found liable for the failure to properly withhold taxes for employees.  The IRS will conduct what is known as an A-4180 Interview, and the findings hold the individual or business liable to the IRS for 100% of the unpaid taxes plus interest.

The IRS takes payroll taxes very seriously and will prosecute multiple individuals within a business for failure to properly fun payroll taxes, regardless of whether that person is actually an owner or control person of the business.  In order to avoid the array of serious issues that can arise as a result of failure to pay payroll taxes, individuals should consult an attorney to discuss the option of setting up a relationship with a bonded payroll tax services that will automatically make the required payroll tax deposits for the business.

Payroll Tax Liability

It is important to establish whether employees of a business are actually considered “employees” or “independent contractors” for tax purposes.  Since employers must pay social security and Medicare taxes, Federal income tax withholding and Federal unemployment (FUTA) taxes for employees but not for independent contractors, the classification of workers can be an important business decision.   As part of a determination over whether an individual is an employee of an independent contractor, a series of factors related to the degree of control an employer has over the individual as well as the general independence of the individual.

Important areas to look at include: 

• Behavioral – does the employer actually control the way the individual does their job? 
• Financial – are all financial aspects of individual’s job controlled by that specific employer? 
• Type of Relationship – “employee” benefits such as pension plans, vacation days, etc?

If the answer is “yes” to the above questions, then payroll tax liability likely applies to the employer and failure to properly pay the tax will result in IRS tax penalties.  It should be noted that the liability for failure to pay payroll taxes can fall on multiple individuals within a business, not just the business owner.  As such, there could potentially be many people who have a vested interest in making sure that a business does not have any payroll tax payment deficiencies. 

Legal Help with Payroll Taxes

Getting legal help from an attorney is often critical to the process of dealing with the IRS for issues related to payroll taxes.  A lawyer with experience in the specific laws governing payroll taxes will be able to help find resolution with the IRS in a way that is as beneficial as possible to the taxpayer.  Seeking out the help of an experienced tax attorney who is knowledgeable on payroll tax laws can translate into major savings for the taxpayer when compared to the resolution that would have otherwise been achieved.