Business owners know that to scale to meet market needs, they likely need to hire workers. When taking this step, it is important to keep tax considerations in mind. Whether a new business or one that’s been around for a while, the Internal Revenue Service (IRS) will expect you to pay payroll taxes, also known as employment taxes.
What are payroll taxes?
Payroll taxes can include federal and state income taxes, Social Security and Medicare taxes as well as federal and state unemployment taxes. The IRS generally expects the employer to hold these payments separate from other business funds and make the payments when they are due. A failure to do so can result in penalties including steep fines.
When do disputes arise?
The IRS has taken an aggressive stance in recent years over how employers classify their workers. The IRS expects employers to pay employment taxes for employees. Employers generally do not have to pay these taxes for workers labeled as independent contractors. Unfortunately, some business owners attempted to bypass the employment tax obligations by mislabeling their workers as contractors leading to a surge in allegations of misclassification.
When looking into allegations of misclassification, the IRS will review a number of factors. These include the autonomy of the worker, training process used by the employer to onboard the new hire and the flexibility of schedule as well as expectations. It will be difficult, for example, for an employer to argue that a worker is a contractor if the worker received company training, has ongoing work expectations as opposed to a set end date in line with a specific project and works a schedule like clocking in and available to the employer from 9 to 5.
If the IRS is able to successfully challenge an employer’s classification of a worker as a contractor instead of an employee, the penalties can be severe. Monetary fines can quickly add up to a hefty penalty and may include back pay as well as additional fines and penalties.
What if I have an issue with payroll taxes?
Take a contact from the IRS seriously. Depending on the issue, it is possible the IRS can get past the protection of the business structure and go after your personal assets.