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What Are The Common Reasons Businesses Run Into Payroll Tax Problems?

Business runs into payroll tax problems for a variety of reasons. One of the most common reasons is because employers misclassify the employees as independent contractors to attempt to avoid paying payroll taxes (Social security and Medicare contributions) in the first place. The EDD (Employment Development Department) in California and the IRS aggressively pursue these misclassification issues and will try to charge a business back taxes plus penalties and interests for misclassifying employees as independent contractors. The IRS will also attempt to charge trust-fund penalties against any party in the business responsible for collecting any payroll taxes from employees. The trust fund penalty is generally a 100% penalty on the trust fund portion of the balance. This balance gets assessed on the responsible person as an individual.

Other reasons why business owners run into payroll tax problems include getting behind on accounts payable and oftentimes, the business treat the IRS as just one more creditor, which is a very dangerous thing to do.

I Have Fallen Way Behind In Paying My Business Payroll Taxes, How Serious Is This?

It is very important for business owners to understand the seriousness of payroll tax issues, not to treat the IRS as just one more creditor. If the payroll taxes remain unpaid, the IRS considers it as the employer not giving the employee credits for social security and Medicare payments. That is basically stealing money from the employees because those funds are part of the employee’s gross wages and it is actually deducted from their pay in order to send directly to the IRS. If an employer does not send that money directly to the IRS, it is basically the employee’s money that the business is incorrectly using. The IRS will attempt to assess these balances on the owners through trust-fund penalties.

The owners will most likely not be able to prevent the trust fund penalty assessment unless it can be shown that the owner is not a responsible party for filing and collecting payroll taxes, which is very hard to do. Trust-fund penalties can also not be discharged through bankruptcy so it is a very serious situation.

Why Does It Matter If I Claim My Employees As 1099 Contractors Or Regular Employees?

The reason employers want to treat workers as independent contractors is because if they do, they do not have to pay the additional social security Medicare and state disability taxes associated with that particular worker. The federal and state government treats this misclassification as a serious offense since the employer is not giving the worker credit for the social security and Medicare contributions if the worker is not classified as an employee. While there are cost savings involved in treating the worker as an independent contractor, you have to make sure that the worker can qualify as an independent contractor. The IRS looks at several items to determine how a worker should be classified.

First, they look at behavioral control over the work. They look at if the business has the right to control the work performed. If so, then it is most likely an employee. They also look at the financial control, who owns the equipment that is used to perform the work, whether the business reimburses the expenses etc. And then, finally they look at the relationships of the employee, whether there are written contracts involved, the permanency of the relationship, these are all items that the IRS look at to determine whether the worker is an independent contractor or an employee.

I Have Not Paid My Business Payroll Taxes For A Long Time, Should I Just Declare Bankruptcy?

The trust fund penalty that is assessed when you owe payroll taxes is not dischargeable through bankruptcy, which is also why it is a very serious issue that business owners should consider. Even if you do not have the funds to pay other creditors, it should always be the first item that a business owner pays.

For more information on Reasons For Payroll Tax Problems, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (714) 321-3369 today.

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