According to federal law, businesses must withhold and pay employment taxes. This applies regardless of whether you own a small coffee shop in Brookhaven Village Plaza or you own a larger business in Norman that employs more than 100 people. Unfortunately, there are many reasons why some business owners run into employment tax problems. Following is an overview of some of the more common tax liability issues that businesses face and their underlying causes.
Why Employment Tax Issues Occur
In an effort to help well-meaning business owners avoid problems, the Internal Revenue Service (IRS) offers a list of the eight most frequent reasons that employment tax issues arise. These reasons include:
- Pyramiding, where the business withholds the tax but fails to remit it to the IRS
- Unreliable payroll service providers or professional employer organizations charged with handling employment taxes
- Frivolous arguments made by employers for why they should not be required to pay employment taxes
- Using offshore employee leasing schemes to try and circumvent the requirements for employment taxes
- Erroneously declaring an “employee” to be an “independent contractor” in order to avoid employment tax
- Paying employees in cash to avoid a record of the payments and simultaneously failing to withhold and pay the tax
- Filing incorrect payroll tax returns or failing to file a return at all
- Treating compensation to officers of an S-Corporation as if it were a corporate distribution that is not subject to employment tax
It is our hope that this information will help you avoid employment tax problems and allow you to focus your valuable time and energy on growing your business. If you are already facing a tax issue, it is not too late to take action. Order our free book, The Ultimate Survival Guide for IRS Problems, to start learning about the many options that are available to you.