Many people wonder how large companies can seemingly unilaterally redefine their employees as independent contractors to reap big tax savings. The reality of the situation is less straightforward, but to at least one employee of Uber, the company’s claim that it was a logistics and technology company that merely collects a matching fee rang hollow. The then-contractor, now-employee filed a complaint with the Labor Commission of California which resulted in a ruling that defined the worker as an employee.
While the ruling is currently limited to only the employee who filed the matter, if the ruling is expanded it could result in significantly expanded payroll tax liabilities for the company and others like it. For business owners it is essential to understand the types of liabilities included in payroll taxes, the effect it can have on your bottom-line, and the consequences one can face when a business fails to maintain its compliance with the duty to account for, hold, and pay over trust fund taxes. The Hoffman Law Firm is dedicated to assisting individuals and businesses with tax compliance. Call us at 800-897-3915 today or contact us online.
What Is Covered by Payroll taxes?
Payroll taxes cover a broad array of government programs. Three of the largest areas that must be accounted for regarding payroll taxes are Social Security, Unemployment Insurance, and Workers’ Compensation. Employers have an obligation to hold collect and hold funds for the government until it becomes time to pay the funds over. Payroll tax obligations a company with employees would face includes:
- Social Security tax — At the lowest tax bracket, those who make more than $15,720 each year and are self-employed must pay 15.3 percent for Social Security and Medicare taxes. By contrast, an employee is only responsible for half of the Social Security and Medicare taxes because the employer will pay for half (7.65 percent) of the tax. Defining workers as contractors rather than employees can lead to significant savings, but if the classification is improper and challenged significant liabilities, penalties, and fines can accrue.
- Unemployment Insurance tax — UI is a state tax that is governed by state law. In California employers pay a certain percentage on the first $7,000 earned by the employee. The cap on employment tax deductions for certain employers is $434 per an employee. For businesses with a significant number of employees, this can add up to significant liabilities.
- Workers’ Compensation – As of late 2014, California law requires all transportation network companies to a lot a minimum of $200,000 in primary coverage for the driver and company. Furthermore a law that went into effect on July 1st now requires drivers to carry at least $1 million in personal injury & property damage insurance.
Business owners must understand how the classification of their employees will affect the company’s tax obligations.
Businesses & Business Owners that Fail to Satisfy Payroll Tax Obligations can Face Serious Consequences
For issues regarding federal payroll tax compliance, Due to the nature of payroll tax fraud, willfulness on the part of the taxpayer or responsible party is often perceived by the IRS agent. When it is believed that willfulness was involved in a tax fraud, Section 6531(2) of the tax code allows the IRS to look back six years from the last willful act. Furthermore, Section 6672 of the code allows for the imposition of personal liability on the parties responsible for the payroll tax obligation. The imposition of personal liability is imposed at 100 percent of the unpaid payroll tax. Because payroll tax obligations can easily reach six-figures and beyond, the transformation of this expense from a business liability to a personal liability can be particularly devastating.
Rely on Our Payroll tax Experience
The Hoffman Tax Law Offices are dedicated to providing strategic and reliable tax guidance and advice for businesses and individuals. If you are facing a tax audit or other tax enforcement action we can provide an aggressive defense of your rights. To schedule a free and confidential tax or payroll tax consultation at our Los Angeles Tax Law Office, call us at 800-897-3915 or contact us online.