Businesses Urged to Avoid Employment Tax Schemes

Businesses that fail to properly withhold employment taxes from employee paychecks or neglect to file and pay employment taxes offer a variety of excuses. Some were “borrowing” the money for awhile, intending to pay it back later. Others collect and decide to keep the tax because of temporary financial difficulties. Some businesses blame disreputable third-party payers or claim ignorance of the law.

Whatever the “reason,” employers that willfully attempt to avoid filing and paying employment taxes are committing a crime that can result in financial penalties and even prison. These taxes consist of federal income tax withholding, Social Security and Medicare taxes and unemployment taxes, as well as any withholding requirements mandated by a particular state.

The Better Business Bureau joins with the Internal Revenue Service to warn businesses to avoid engaging in tax evasion schemes. Among the most common forms of employment tax non-compliance, as identified by the IRS, are:

• Hiring Unreliable Third-Party Payers. Most Payroll Service Providers and Professional Employer Organizations provide upstanding service. But there are a few less-than-reputable third-party payers who fail to pay the collected taxes to the IRS. Employers should check with the BBB (www.bbb.org) to find a trustworthy third-party payer, and once hired, regularly verify that payments are being made on their behalf.
• Believing Frivolous Arguments. Unscrupulous promoters use misleading arguments to encourage businesses to avoid paying employment taxes. Don’t fall victim to incorrect interpretations of tax laws or the improper use of Form 941c to attempt to secure a refund of previously-paid employment taxes.
• Offshore Employee Leasing Schemes. Don’t do business with shady promoters affiliated with offshore companies who misuse the otherwise legal business practice of employee leasing. Consult with reputable legal and tax experts before entering into employee leasing arrangements.
• Misclassifying Worker Status. Don’t be tempted to incorrectly treat employees as independent contractors to avoid paying employment taxes. If the employer has the right to control what work will be done and how it will be done, the worker is an employee.
• Paying Employees in Cash. There is nothing wrong with compensating an employee in cash, so long as the business recognizes that employment taxes are owed regardless of how the employee is paid.
• Filing False Payroll Tax Returns. Preparing false payroll tax returns or understating the amount of wages on which taxes are owed is illegal.

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