Any company that pays wages to employees must pay employment taxes to the Internal Revenue Service (IRS). These two taxes consist of Social Security tax and Medicare tax. Employers must deduct half of these taxes from the employee's wages and pay the other half themselves. Taxes must be paid either monthly or semi-weekly. Seventy percent of all monies collected by the IRS are through employment taxes.
As a business and employer, it is your job to ensure you comply with all federal and state payroll tax laws.
Some Common Payroll Tax Schemes
Unfortunately, many businesses find creative ways to cheat the government out of payroll taxes and keep the profits for themselves. Some of the most common payroll tax schemes employers use are:
One way that employers avoid paying payroll taxes is to classify actual employees as contractors. Employers do not have to withhold taxes from contractor payments. They may even provide employees with 1099 tax forms instead of W2s at the end of the year to continue the scam.
When a company deducts employment taxes from employees' wages but then does not pay those taxes to the government, that is called pyramiding. It is another way businesses try to avoid paying payroll taxes. Sometimes these businesses file for bankruptcy more than once to try and avoid paying other creditors as well.
Paying Employees with Cash
Some employers prefer to pay employees in cash to avoid a paper trail or deduct employment taxes and pay their share. However, the law states that even if employers pay workers in cash, they still must pay the taxes due on those funds.
Bogus Tax Returns
Another way fraudulent companies avoid paying payroll taxes is by submitting false tax returns and failing to file payroll tax paperwork when they are due.
Tips to Protect Yourself from Employment Tax Fraud
Some tips to avoid employment tax fraud are:
- Transparency – Hire bookkeeping professionals to handle payroll functions and train them on how to comply with all state and federal laws.
- Employee Classification – Strictly adhere to a legal policy of clarifying employees correctly based on their W4 or W9 status.
- Hire Professionals – Hire an accounting professional or a payroll service company to handle all your employment tax payments and returns.
- Checks and Balances – Be sure to implement a system of checks and balances so that no one employee has control or power over all your payroll records.
Tax fraud is a serious matter and could result in dire consequences for you or your company. Contact the Walton Law Firm today if you need help with any legal issue or require assistance setting up proper record keeping to avoid any employment tax issues.