This article was originally published in Financial Executive, May 2010
About 6,000 companies nationwide are being selected at random
for a Payroll Tax.
Tax an employer withholds and/or pays on behalf of their employees
based on the wage or salary of the employee. In most countries,
including the U.S., both state and federal authorities collect some
form of payroll tax. audit. The audits will focus on whether
companies are paying all of their required employment taxes that
fund Social Security and Medicare. The Internal Revenue Service
wants to know how many companies are misclassifying employees as
independent contractors and failing to pay taxes on fringe
benefits. The initiative is expected to last for three years.
It is likely that the IRS will find many companies in violation
of regulations concerning how workers are to be classified for
payroll tax purposes, as there is a clear incentive to classify
employees as independent contractors.
Companies are required to pay half of their employees' 12.4
percent Social Security and 2.9 percent Medicare tax. However, if
the employee is misclassified as an independent contractor, the
company does not pay these taxes
The IRS estimates that companies underpay approximately $14
billion annually by misclassifying employees as independent
contractors. The recent economic recession will most likely
increase the pressure on companies to avoid these payroll
taxes.
A failure to pay penalty is commonly assessed in these situations,
which can be costly -at up to 25 percent of the unpaid tax
liability.
In addition to imposing civil penalties, if the IRS believes that
fraud was involved in the payroll tax violation, it will refer the
case to the Criminal Investigation Division for investigation.
Section 7202 of the Internal Revenue Code. The Internal
Revenue Code is the body of law that codifies all federal tax laws,
including income, estate, gift, excise, alcohol, tobacco, and
employment taxes. These laws constitute title 26 of the U.S. Code
(26 U.S.C.A. § 1 et seq. makes it a criminal offense to willfully collect and pay taxes.
Violators may be imprisoned for up to five years; fines up to
$250,000 may be imposed on individuals and corporations may be
fined up to $500,000.
The rules relating to whether a particular individual is an
employee or an independent contractor are complex and confusing. If
there is any doubt as to the status of a particular independent
contractor, an experienced professional should be consulted.
Companies that find themselves under civil or criminal
investigation by the IRS should promptly obtain experienced counsel
as these are extremely serious investigations. Companies are also
advised to review all payroll practices and tax withholding and
consult with experienced counsel to resolve uncertainties or
potential problems before they are contacted by the IRS.
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.
