According to a Department of Justice press release, a federal court recently ordered a taxpayer to start accounting for and paying over employment taxes to the IRS. If you are a frequent reader of our blog, you know that we frequently highlight the importance of payroll tax compliance. When you add in California’s evolving laws relating to worker classification, employer-related tax compliance can seem like a minefield that requires precise navigation. If you are a business owner or are responsible for your company’s employment tax function and have concerns about your employment tax function, it would be prudent of you to contact an experienced employment tax attorney for a consultation.
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Court documents indicate that El Mundo Feliz (a U.S. partnership) and one of its owners, Daniel Martinez Jr. were in the business of providing home adult day care services serving residents in southern Texas. According to prosecutors, between 2012 and 2019, the company failed to send the required employment tax payments to the IRS. The tactic, better known as “pyramiding” occurs when an employer fails to pay employment tax liabilities over time, allowing them to stack. The IRS and Department of Justice estimate that El Mundo Feliz and Martinez Jr.’s misconduct has caused a current tax loss of more than $600,000.
The court ordered that the company pay over the employment taxes currently owed and file 24 missing quarterly employment tax returns (Form 941). Additionally, the court ordered the defendants to pay over more than $40,000 in unpaid unemployment taxes. Failure to comply with the injunction and additional court orders could result in criminal charges.
We cannot stress the importance of employment tax compliance enough. Combined with the withholdings taken from employee’s paychecks, other employment taxes help fund some of the country’s most vital programs. The IRS will go to great lengths, as evidenced in the case above, to ensure that employers are properly paying over employment taxes to the IRS.
In light of the recent passage of A.B. 5 in California, a law that re-defines the role of an independent contractor, many employers are scrambling to ensure that they are complying with employment tax laws. Although California and federal law historically provided a definition for what constituted an employee vs. an independent contractor, A.B. 5 was used to target gig-economy workers. Nonetheless, A.B. 5, which focuses on the function of the worker in comparison to the overall objective of the business, the ability of the worker to bargain for their wage, and whether the worker performs similar services for other companies, can affect more than just gig-economy workers and employers.
Companies with a workforce that straddles the line between employee and independent contractor run the risk of having their workers reclassified by a tax authority as employees, resulting in employment taxes being due. This type of worker reclassification could cost employers an arm and a leg. If you own a business with a workforce that could be affected by A.B. 5, it is in your best interest to contact an experienced employment tax attorney to develop a strategy to mitigate your tax risks.
Whether you are an employer who is dealing with the uncertainty around A.B. 5 or owe back-employment taxes and seek a way to be compliant without bankrupting your business, a consultation with an experienced tax lawyer may prove very helpful.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience representing a diverse group of taxpayers. From individuals to middle market businesses and beyond, our team of zealous advocates will assist in the development of a strategy to help you reach your specific goals and objectives. Whether you are under a tax examination or are in need of tax planning advice, contact the Tax Law Offices of David W. Klasing today, online or by phone at (800) 681-1295, for a reduced-rate consultation.
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