Employment Tax Resolution
Introduction to Employment Tax Resolution
Employment (Payroll) Tax Resolution uses every possible method to solve business tax problems with the Internal Revenue Service (IRS). This includes proactive methods such as Offer in Compromise or Installment Agreements. These methods allow the taxpayer to have some control. However, the IRS uses reactive methods when they control the process. Examples include bank levies or liens against the taxpayer’s properties.
What is Employment or Payroll Tax?
Individuals, businesses and all of their employees must pay taxes to federal, state, and local agencies. Employers refer to these taxes as “employment or payroll tax”. Subsequently, employers withhold a number of different types of taxes from their employees’ paychecks. Similarly, the self-employed pay and deposit taxes with other tax agencies. Self-employment taxes include Social Security and Medicare taxes. Consequently, individuals or businesses who fail to pay these taxes are liable for penalties and interest.
Types of Payroll Taxes
By law, employers withhold income tax from employees’ paychecks. Employees can adjust the tax amount withheld by filing IRS Form W-4. This form designates the number of withholding allowances they want to claim. Most importantly, adjusting the amount withheld will closely match their overall tax liability determined at the end of the year. Done correctly, employees can avoid owing huge amounts of money in taxes when filing their yearly tax return. In addition, they may be entitled to a tax refund. Thereafter, the employer immediately deposits these taxes with the IRS.
There are different types of employment taxes. These taxes support different programs aimed to assist employees. Furthermore, tax monies are used to pay employees that become unemployed or injured. In addition, some of these taxes support the self-employed or independent contractors.
Employers’ Employment Taxes
Payroll taxes are deducted from every employee’s paycheck. Furthermore, self-employed and independent contractors must also pay some of these taxes. Payroll taxes include:
Federal Insurance Contribution Act (FICA)
FICA covers two tax programs: Social Security and Medicare. Although this tax rate does not change, an employee’s portion may vary. An employees’ overall earnings during a given year determines the amount.
Federal Unemployment Tax Act (FUTA)
This tax is paid only by the employer. Thus, it is calculated at the rate of 6% for the first $7,000 paid to an employee. Thereupon, it is not paid on amounts earned thereafter. In addition, different states have their own unemployment tax programs for employers.
Unemployment Insurance Tax (UI)
This is a federal-state program financed through federal and state employer taxes. The federal side of the program is called Federal Unemployment Tax or FUTA. Yet, the unemployment tax differs from state to state. The program is based on experience-ratings. In other words, employees working for firms that lay off a higher percentage of their employees within a state can collect a greater amount of unemployment benefits. Consequently, the firms themselves pay much higher tax rates than businesses that lay off fewer workers.
Local Payroll Taxes
Cities impose a payroll tax that is usually paid by both employee and employer. This tax can vary in range.
Worker Compensation Benefit Funds
Employers must pay into state-run funds that provide benefits for workers who get injured or sick due to work. As a result, these benefits are governed by state workers compensation laws. In addition, they are paid by employer contributions to workers compensation funds.
These self-employment taxes are sometimes called SECA taxes. Similar to FICA taxes, SECA Taxes cover Social Security and Medicare taxes for those who are self-employed. Furthermore, this tax covers retirement benefits, survivor benefits, disability benefits and hospital insurance (Medicare) benefits. In addition, if an individual earns more than $200,000, an additional Medicare tax is required. The tax is determined by the individual’s net income. The rate is 12.4% for Social Security plus 2.9% for Medicare, totaling 15.3%. The base limit is $137,700 for 2020 and $142,800 for 2021. However, if an individual earns more than $200,000, he/she will have to pay an additional tax of 0.9% for Medicare. Since the self-employed individual pays both shares of this tax (individual and employer), the employer amount is used as a business expense.
Employers’ Employment Taxes
Self-employed must also pay employers’ employment taxes if they have employees.
Withholding Payroll Taxes from the IRS is Illegal
True, especially if employers use that money for business expenses. Furthermore, employers are required to withhold taxes for their employees. Then these monies are deposited into an authorized bank or financial institution. In addition, businesses are also responsible for filing the FUTA (The Federal Unemployment Tax Act) return annually. Unfortunately, criminal and civil sanctions may be imposed on any employer who does not comply with employment tax laws. This is especially true if they willfully failed to pay employment taxes. Moreover, this could also lead to heavy penalties. Therefore, it is important for any business to calculate the amount of payroll taxes owed and to pay them on time.
After all, the employer collects the payroll taxes “in trust.” In other words, the employer acts as an agent of the IRS in withholding the correct amounts for each payroll tax. Employers calculate all taxes for each employee. Then, the employer must deposit this money for the IRS. The employer cannot “borrow” from this trust fund. The reason does not matter. This is illegal. Such an employer will be assessed heavy penalties with interest. This employer’s properties are in danger of being seized in lieu of payment.
Employer and Employee Are Responsible
Both the employer and the employee are responsible for ensuring taxes are being taken out correctly. Consequently, an employee is liable for additional taxes after filing their tax return if they did not fill out their W-4 correctly. In addition, they are liable if they do not correct an error in the payment of taxes. Unfortunately, this situation leads to an employment tax resolution scenario. Hence, employees must review pay stubs and W-2 forms for accuracy. In other words, they bear accountability to the IRS as well.
Typically businesses withhold monies from their employees’ wages for tax purposes. However, this is not always the case. Some businesses hire their employees as independent contractors. Therefore, they are not required to withhold taxes. However, independent contractors are responsible for paying their own taxes and should receive 1099 forms from their employers. Employers do not collect or deposit employment taxes to the IRS for independent contractors. Moreover, independent contractors will not receive a 1099 if they earn less than $600. But they will still have to report the amount earned to the IRS. For this reason, independent contractors must keep accurate records regarding their earnings. After all, they are solely responsible for the payment of taxes to the IRS.
Examples of an Independent Contractor include those who work as/for the following:
- Uber Driver
- Lyft Driver
- ALERT: recent Court rulings have declared some of the above as employees. Therefore, check local laws.
Employment Tax Resolutions
The IRS seeks several ways to recover tax money whenever an employer fails to pay employment taxes. Furthermore, there are assessment penalties and interest if the employer willfully failed to pay the tax. Unfortunately, these penalties can place the business owner’s personal assets in jeopardy of seizure. The IRS conducts an investigation in the form of an interview (Trust Fund Penalty Assessment Interview). Additionally, the IRS reviews all documents, including those of the owner and the business. After the process is completed, the IRS can assess the penalty which is pretty hefty. This is called a Trust Fund Penalty Assessment. The IRS is required to give any individual a notice of intent to seize any properties or assets. At this point, the taxpayer has only 30-days to appeal this decision. Of course, time is of the essence. Accurate records assist in the defense of a Trust Fund Penalty Assessment.
Employment Tax Resolutions involve installment agreements, partial installment agreements, offers in compromise, and currently non-collectible. In addition, tax resolutions can minimize the impact of bank levies, liens, seizures of properties or assets, and wage garnishments. For example, withdrawals, releases, discharges, and subordinations remove the “freezing or seizing” of assets.
A tax professional assists in resolving payroll tax issues. Sometimes payment plans provide a win-win for the taxpayer and the IRS. In this case, the IRS collects the tax debt while the taxpayer pays down his or her debt without more interest and penalties. In other cases, the IRS permits other options that create less of a hardship for a taxpayer who cannot afford the tax debt. Your tax professional can assess the situation and suggest all options. However, the best advice of all is to pay all employment taxes on time to the IRS.
To learn more about Employment Tax Resolution, review the following:
Responsibility and accounting are very important in adhering to employment tax laws. Paying taxes is an obligation for the self-employed, business owners and employees. Luckily, we are here to help with some of that responsibility and accountability. Contact us today and see how we can help you with your employment tax resolution situation. Be sure to bring all documents and notices. Check our IRS tax resolution services page for more information.