Whether a business owner has a staff of one or 1,000, he is required to pay employment taxes for himself and his employees. These taxes consist of federal income tax withholding, Social Security and Medicare taxes and unemployment taxes, and any withholding requirements mandated by the state.
Failing to pay these taxes can result in steep fines or even prison sentences, and the Better Business Bureau is advising business owners to ensure they are fully complying with tax law.
Businesses that fail to properly withhold employment taxes from workers' paychecks or neglect to file and pay employment taxes offer many reasons. Some owners claim ignorance of the law. Some collect and keep the tax because of temporary financial difficulties. Some blame disreputable third-parties who manage their finances.
The BBB notes that in January 2008 alone, four business owners were fined as much as $4.2 million and received prison sentences of up to 48 months for failing to pay employment taxes. Some paid their employees under the table or had elaborate schemes to avoid paying employment taxes.
The BBB encourages business owners to be intimately involved in tax filing and payment processes. Business owners also should be aware of six common ways companies have gotten into hot water for employment tax noncompliance:
HIRING UNRELIABLE THIRD-PARTY PAYERS: Most payroll service providers and professional employer organizations provide upstanding service. But there are some less-than-reputable third-party payers who fail to pay the collected taxes to the IRS. Employers should check with the BBB to find a trustworthy third-party payer, and once hired, verify that tax payments are being made.
BELIEVING FRIVOLOUS ARGUMENTS: Unscrupulous promoters use misleading arguments to encourage businesses to avoid paying employment taxes. Don't fall victim to incorrect interpretations of tax laws or the improper use of Form 941c to attempt to secure a refund of previously-paid employment taxes.
OFFSHORE EMPLOYEE LEASING SCHEMES: Don't do business with shady promoters affiliated with offshore companies who misuse the otherwise legal practice of employee leasing. Consult with reputable legal and tax experts before entering into employee leasing arrangements.
MISCLASSIFYING WORKER STATUS: Don't be tempted to incorrectly treat employees as independent contractors to avoid paying taxes. If the employer has the right to control what work will be done and how, the worker is an employee.
PAYING EMPLOYEES IN CASH: There is nothing wrong with compensating an employee in cash, as long as the business recognizes that employment taxes are owed regardless of how the employee is paid.
FILING FALSE PAYROLL TAX RETURNS: Preparing false payroll tax returns or understating the wages on which taxes are owed is illegal.
Kelvin Collins is the President/CEO of the Better Business Bureau of Central Georgia & the CSRA Inc., which serves 41 counties from Augusta to Macon. Questions or complaints about a specific company or charity should be referred directly to (800) 763-4222 or firstname.lastname@example.org.