What You Don’t Know About Employment Taxes Can Hurt You
Your business is finally taking off? Take a moment to celebrate your achievement.
If you think you no longer need to concern yourself with the accounting end of your business, however, think again. If you are the person considered legally responsible for paying your company’s taxes, you need to know exactly what is going on in regard to employment taxes. This includes sole proprietors, limited liability company (LLC) members, partners, corporate officers and directors, and anyone else with authority in the business.
Why? You could be held personally liable for business debts. You could lose your business. You could be charged with a tax crime.
Whoa. Which Taxes Are We Talking About?
Employment taxes are those related to employees. Broadly, they include 1) the federal taxes you withhold on behalf of your employees; 2) both the employee’s share you withhold and the employer’s share you pay of Social Security and Medicare taxes; 3) any additional Medicare taxes for employees with incomes above a certain threshold; 4) federal unemployment (FUTA) taxes. Technically, payroll taxes are the Social Security and Medicare subset of employment taxes.
All My Workers Are Independent Contractors, So I Don’t Have To Pay Employment Taxes, Right?
Not necessarily. The IRS and other federal agencies have legal definitions of which workers can be considered contractors and which are employees. It is worth having an attorney review your legal relationships with anyone doing work your company profits from. If someone works exclusively for the benefit of your business, however, it is a good bet that person is legally an employee.
Are Your Employment Taxes Being Withheld And Deposited With The IRS?
Most of these should get deposited on IRS deadlines that occur either every other week or once a month, depending on the type of business. FUTA taxes get deposited quarterly. All of these must be deposited via electronic funds transfer, or EFTPS.
If you are late depositing your payroll taxes, the penalties and interest add up quickly. They start at 2 percent for a payment one to five days late and quickly rise to 15 percent for any remaining unpaid more than 10 days after the IRS sends its first notice requesting payment.
If the IRS determines you are the person at your company responsible for paying employment taxes and you have willfully refused to do so, you could be held personally responsible for paying them — and potentially charged with a federal crime. Borrowing from payroll taxes can also be considered a federal crime.
Even if you are not deemed responsible or criminally charged, the IRS has enormous collection powers. It can padlock the doors to your premises. It can seize your equipment. It can contact your customers and intercept the money they owe you through its levy power. It can freeze and seize your bank accounts, including accounts payable. Essentially, the IRS can put you out of business — and it does not need a court order to do so.
Paying employment taxes properly and on time is fundamental to running a business, and you should know that small businesses are the most common target of IRS audits and tax enforcement.