Employment Tax Resolution

Introduction to Employment Tax Resolution

Employment Tax Resolution utilizes every possible method to resolve 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 over the resolution. Reactive methods are used when the IRS controls the process. Such cases include bank levies or liens against properties of the taxpayer. Most employment tax resolutions involve payroll or employment taxes and their collection and distribution.

What is Employment or Payroll Tax?

Individuals, businesses and all of their employees are expected to pay taxes to federal, state, and local agencies. Employers refer to these taxes as a “employment or payroll tax”. Subsequently, a number of different types of taxes are withheld from employees by their employers. Similarly, taxes are paid and deposited with the appropriate tax agencies by those individuals who are self-employed. Self-employed business owners must pay self-employment which includes the Social Security and Medicare taxes. If the IRS believes any individual or business has not paid these taxes, they are liable for penalties and interest.

Types of Employment Taxes

Income tax must be withheld from employees’ paychecks. Employees are able to 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. A number of different types of taxes must be withheld from employees’ paychecks. Thereafter, these taxes are then immediately deposited to the IRS after payroll including:

Employers' Employment Taxes

FICA covers two tax programs: Social Security and Medicare. Although this tax rate does not change, an employee's contribution may vary depending upon an employees' overall earnings during a given year.

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. Additionally, different states have their own unemployment tax programs for employers.

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.

Cities impose a payroll tax that is usually paid by both employee and employer and can vary in range.

Employers must pay into state-run funds that provide benefits for workers who get injured on the job or sick because of their work. These benefits are governed by state workers compensation laws. In addition, they are paid by employer contributions to workers compensation funds.

Self-Employment Taxes

These taxes are sometimes called SECA taxes. Self-Employment Taxes are similar to FICA taxes in that they 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 over $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 calculated as a business expense.

Self-employed must also pay employers' employment taxes if they have employees.

Is it illegal to withhold employment taxes from the IRS?

Yes, especially if employers use that money for business expenses. Employers are required to withhold taxes for their employees. These monies are then 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, any employer who does not comply with employment tax laws may be subject to criminal and civil sanctions 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.

It is the responsibility of both the employer and the employee to ensure taxes are being taken out correctly. Consequently, an employee could also be liable for additional taxes after filing their tax return if they did not fill out their W-4 correctly. This situation could result in an employment tax resolution scenario.

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. If the independent contractor earns less than $600, they will not receive a 1099. But they will still have to report the amount earned to the IRS.

Examples of an Independent Contractor include those who work as/for the following:

Employment Tax Resolutions

When employer fails to pay employment taxes, the IRS seeks several ways to recover that money. If the employer willfully failed to pay the tax, then there are assessment penalties. 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. After the process is completed, the IRS can assess the penalty which is pretty hefty.

To learn more about Employment Tax Resolution, review the following:

Next Steps:

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. Check our IRS tax resolution services page for more information.

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