If you’re a business owner or manager who personally takes care of payroll taxes, you might be worried about any potential stumbling blocks. Naturally, you want to make sure you abide by the law and see that your tax-paying practices are up to scratch. Tax mistakes are easy to make when you’re not aware of your obligations, and many can lead to serious financial and even criminal penalties. Because even simple mistakes can compound payroll period – to – payroll period, there are few things more time-consuming than unwinding employment tax snafus. And the real kicker can be that if you are responsible for administering withheld income and employment taxes and seeing that they are properly deposited and paid, you could be held to be personally liable for any deficiencies even if you are not personally the employer, or even an owner of the Company-employer. Take a look at these common tax mistakes to make sure you’re not opening yourself up to trouble with the IRS.
- Classifying employees as independent contractors
While it may be tempting to treat a worker as an independent contractor, thereby avoiding payroll taxes and employee benefit costs, you don’t actually have the license to choose your own classification. If you have the right to control when, where, and how the worker completes assigned tasks, then the worker is generally considered to be your employee. If you misclassify a worker, the employer will be held liable for that worker’s employment taxes.
- Poor record-keeping
Make sure you retain and organize your time sheets, expense accounts, cancelled and cashed checks, copies of W-2s, and other payroll records. Generally speaking, payroll records must be kept available for at least four years in case the IRS needs to perform an examination. Failure to keep adequate records could result in back taxes, penalties, interest, and in extreme cases, even jail. Very simply, even if you have very few employees, you are going to need a payroll service. A good payroll service (and I can recommend one) will help you avoid all of the problems and pitfalls discussed here.
- Making late payroll tax deposits and payments
A month can go by in a flash when you’re a business owner, but you should never miss your tax deposits and payments. If your payroll is large enough, you may be required to make deposits on as often as an eighth-monthly basis. You will most likely have to pay hefty penalties any time you make a late payment or deposit. If your tax deposits are considerably late, you could be penalized for up to 25% of the amount.
- Failing to use an accountable plan for employee reimbursements
An accountable plan allows you to save tax money when you pay for employee business costs like travel, entertainment, tools or equipment, and others. You’ll have the option to deduct these expenses and avoid payroll taxes on the reimbursements. If you properly account for all of the reimbursable expenses and make sure they are business related, you’ll avoid wasting employment tax dollars.
- Neglecting to deposit withheld federal income and employment taxes
As an employer in the United States, you are legally required to withhold federal income tax, Social Security, and Medicare taxes from the wages or salaries earned by your employees. In effect, the Federal Government has deputized you as its tax collector. Unlike your or the Company’s income taxes, when you take your or the Company’s money to pay the tax, these withheld taxes are never your money, they are the Government’s money. When you withhold taxes, you may not legally “borrow” or use these funds to pay for other company expenses—no matter how badly your business may need the money. The Government regards this as tantamount to theft and does not take it kindly. The consequences for neglecting or misusing payroll taxes range from penalties and interest to personal liability for “responsible persons” and potentially criminal prosecution.
A good accountant and a good payroll service can be instrumental in avoiding these common tax mistakes. They can advise you on the proper employee classifications, keep your records, make your payments on time, and manage your accountable plan. There are many other common yet substantial mistakes, from calculation errors to missing forms, that you could make without the help of a qualified accountant and payroll service. If you’re facing penalties, personal liability or other consequences due to tax mistakes, now is the time to seek professional assistance. Call the law office of Morgan Maxwell to see how we can help resolve your tax law issues.
Written by E. Morgan Maxwell
Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.
