What does the employment classification of workers have to do with payroll tax audits?
Everything.
When the Employment Development Department of the State of California decides to audit, the classification of your workers is the auditor’s sole concern. Additionally, the IRS often adopts the results of the EDD audit to use in assessing federal penalties.
For this reason, it is critical to classify your workers properly and supply only the information the auditor asks for, nothing more.
In a previous post, we talked about the difference between independent contractors and employees. One of the biggest differences, and one that often drives intentional worker misclassification, is that employers must withhold and pay payroll taxes for employees whereas they do not for independent contractors.
You have hired someone to do work for you. Is that person an employee or an independent contractor?
The answer is important because misclassifying an employee as an independent contractor, whether intentionally or through ignorance, can land you in court and in debt for payroll taxes.
There are several tests from a variety of regulatory agencies that are used to try to determine employment status and occasionally changes are made to the standards. Even if you classified certain of your workers correctly before, you might need to revisit the question to ensure you remain in compliance.
Part of being a business owner is filing and paying payroll taxes for your employees. In California, the Employment Development Department, or EDD, administers these taxes. In addition to receiving tax filings and payments, the EDD also identifies and investigates potential infractions of tax law.
What do you do if you develop tax problems and find yourself on the receiving end of an audit?
With so much conflicting information about the California self employment tax process floating around online, it can often be difficult for a lot of people to figure out precisely what these taxes are, how they’re calculated, paid, and what the consequences of non-payment might be.
As an employer, you are obliged to file payroll tax returns and pay payroll taxes. While the obligation can feel burdensome, especially when times are tough and cash flow is slow, this is obligation that you must never delay. Substantial penalties may accrue to any employer who doesn’t file correctly, leaving you in a far worse situation than before.
As a business owner, you are responsible for paying payroll taxes and filing periodic reports in accordance with your obligations. If you do not do so, you risk having a lien recorded against your property by the EDD. The details of tax liens are confusing to many people, but it’s important to understand what a lien is, why they are issued, and what your options are to avoid or discharge the lien.
If your company has been struggling with tax issues and the resulting penalties, the trust fund penalty (TFRP) can be a crushing blow with far-reaching consequences for your personal financial security and future.
But all is not lost…
Join us as we discuss common questions, such as “what is the trust fund recovery penalty?” and, “how do you avoid the trust fund recovery penalty?”
Also sometimes referred to as the “responsible person penalty,” a trust fund recovery penalty is a personal liability that may occur if a company’s payroll taxes are not properly remitted to the Federal government.
Typical examples of employment taxes not remitted are Medicare and social security deductions from employees’ wages.
It forms part of the payroll tax audit, and is definitely not something you should ignore.
For uncollected tax, the trust fund recovery penalty calculation is the employee’s part of any withheld FICA taxes plus withheld income taxes, and will be the same amount as unpaid trust fund taxes. For collected taxes, trust fund recovery penalties are the unpaid amount of collected excise taxes.
Payroll tax fraud can occur either through deliberate criminal activity or simply because an employer or employee has provided inaccurate or incomplete information. The Employment Development Department (EDD) takes payroll tax fraud extremely seriously, so it is imperative that you understand the ways in which fraud can occur and take the necessary steps to avoid committing fraud.
The Employment Development Department in California has been particularly aggressive in the area of independent contractor reclassification audits. In the eyes of the Employment Development Department, California businesses have been abusing the system by treating workers who should be classified as employees as independent contractors. In doing so they shift the burden for payroll taxes onto the worker and avoid their own contributions to the payroll tax and unemployment insurance system. As a result, the Employment Development Department has been particularly vigilant in auditing businesses for perceived abused of the system. Often these independent contractor reclassification audits can be costly for businesses.