IRS Tax Problems

Business Owners Face Significant Legal Consequences for Payroll Tax Failures

Business Owners Face Significant Legal Consequences for Payroll Tax Failures

A California business owner is facing a statutory maximum sentence of 33 years in federal prison in connection with a string of alleged payroll tax offenses. While Luis E. Perez is accused of significant wrongdoing, his case is a cautionary tale for anybody shrugging off misclassifying or underpaying payroll tax.

Every employer in the United States is required to properly categorize the people working for them as either exempt employees, non-exempt employees, or independent contractors. Each group is treated differently from the perspective of both payroll and withholding taxes, and it is important that they are each classified correctly. 

  • Exempt employees are generally executives or salaried employees. They do not get docked pay if they fall short of forty hours in a week or get paid overtime if they work more than forty hours in a week. They generally have a greater level of autonomy with their own schedule. Employers withhold payroll taxes on their behalf and submit them to the IRS on a regular basis.
  • Nonexempt employees are hourly wage earners. They are frequently expected to clock in and out of work and get paid overtime if they exceed their scheduled forty hours in a week. Employers withhold payroll taxes on their behalf and submit them to the IRS on a regular basis.
  • Independent contractors are not employees. They provide work to organizations but set their own schedules and make all of their own decisions about how they pursue their work goals. They often have more than one client at a time. Employers do not withhold payroll taxes on their behalf — these workers pay self-employment taxes and submit quarterly estimated income taxes directly to the government.

Companies can face significant legal consequences when they don’t take care with properly categorizing their workers and paying them appropriately, or submitting their payroll taxes appropriately. The outcome is even worse when the improper submissions are purposeful. That was apparently the case with Mr. Perez, who was originally charged with tax evasion in early 2018 for failing to pay more than $29 million in payroll taxes, then doing the same thing again on another $29.6 million in payroll taxes while free on bond from the first tax evasion count. Perez is also charged with making false statements to IRS revenue officers, failing to include material information in documents submitted to the IRS, and attempting to evade collection efforts by buying luxury items and titling them in the names of his businesses and other individuals.

While Mr. Perez is certainly a special case, companies can get into trouble for mistakenly misclassifying employees as independent contractors or non-exempt employees as exempt employees. Even when made innocently, these mistakes can lead to tens of thousands of dollars having to be paid to employees in back wages, as well as the cost of litigation and the amounts that need to be repaid to the IRS in back taxes and fines.

If you are an employer and you are not certain about how your workers should be classified or whether you are correctly withholding and submitting taxes, don’t wait for the IRS to come calling. Contacting your tax professional to make certain that you’re doing everything correctly will save you stress, headaches, and money in the long run. 

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Frank Jenkins Jr

Frank Jenkins Jr

Frank Jenkins Jr. is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, accounting, audit & assurances. "I genuinely care about our clients because I have a personal connection with them. This job requires me to multi-task and work under tight deadlines. I get great professional satisfaction from balancing firm and client commitments while building a strong team here at AJC."

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