Most California employers are conscientious about collecting and paying over their employment taxes. Some of my clients is Los Angeles County, Orange County, Ventura County and Santa Barbara County have problems with access to capital and cannot help it when they become unable to pay the FICA tax. But for other California employers, federal employment tax avoidance is intentional and takes various forms. Some of the more common methods of avoidance include paying employees in cash, employee leasing, filing false payroll tax returns or failing to file payroll tax returns, and pyramiding.
Paying Employees in Cash
The loss or reduction of future social security or Medicare benefits for the employee is one of the consequences when paying employees in whole or partially in cash. Cash payments are a common method of avoiding income and employment taxes.
Employee leasing is commonly used by employers who contract with outside businesses to handle all personnel, administrative, and payroll duties for employees. Employee leasing is a legal business practice which is sometimes abused. At times, employee-leasing companies fail to pay to the IRS any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the employee-leasing company dissolves and leaves unpaid millions in employment taxes. The company owners are likely to become personally liable for a large portion of the unpaid tax which the IRS diligently works to collect.
Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns
Employment taxes are avoided when employers prepare and file false payroll tax returns which understate the amount of wages on which taxes are owed. Employers also fail to file employment tax returns to avoid employment taxes.
Pyramiding of employment taxes is where a business withholds taxes from its employees quarter after quarter but intentionally fails to pay them to the IRS. Often, a business involved in pyramiding will file for bankruptcy to discharge the non-trust fund portion of the liabilities accrued and then start a new business under a new name and begin a new scheme. Despite the bankruptcy, the company owners are likely to become personally liable for a large portion of the unpaid trust fund portion of the tax which the IRS diligently works to collect.
In each of these situations, the employer is bound to be contacted by the IRS. At the time of contact, if not sooner, the employer ought to reach his California tax attorney who is knowledgeable about resolving tax controversies. For tax help, call Mitchell A. Port at 310.559.5259.