All businesses in the United States which hire employees are legally required to pay employment taxes to the IRS. These employment taxes consist of two separate taxes: social security tax and Medicare tax.
Social Security Tax – The current tax rate for social security taxes is 6.2 percent for employees and 6.2 percent for employers, or 12.4 percent total.
Medicare Tax – The current tax rate for Medicare Tax is 1.45 percent for employees and 1.45 percent for employers, or 2.9 percent total. An additional .9 percent tax must also be paid for all wages totaling over $200,000 for individual employees or $250,000 for married couples.
The IRS requires that employees pay half of the total amount of taxes owed out of their own pockets, while at the same time withholding the other half from their employees’ paychecks. That money must then be sent to the IRS, or another authorized financial institution, on a regular basis. Unfortunately, however, often many employers seek to withhold their tax burden for their own personal gain. Below are some of the most commonly used employment tax avoidance schemes.
Pyramiding is the process where a business will withhold taxes from the paychecks of its employees, but then intentionally fail to pay the owed taxes to the IRS. Pyramiding, for all intents and purposes, is simple theft. Many businesses that use the pyramid tax evasion scheme will file for bankruptcy in order to discharge any liabilities they may have accrued. They will start new businesses using a different name to begin their tax evasion schemes all over again.
Paying Employees in Cash
One of the most commonly used forms of tax evasion schemes employed by businesses is to simply pay their employees in cash. By paying their employees – either wholly or partially in cash – many businesses try to avoid paying the correct amount of employment tax. While paying employees in cash is entirely legal, it makes detecting wrongdoing difficult for the IRS, and defrauds employees of social security and Medicare benefits in the future.
Another commonly abused-yet-legal technique businesses use to evade taxes is employee leasing. Employee leasing is when a business contracts an outside business to handle the bulk of their administrative, personnel and payroll concerns for their employees. Often, these companies will fail to report any portion of the collected employment taxes to the IRS. Instead, these taxes are usually spent by the business owners for their own personal benefit. In addition, these companies often dissolve, leaving huge sums of unpaid taxes in their wake.
Filing False Returns
Another common employment tax scheme a business may employ is simply falsifying their payroll tax returns. By purposely understating the number of wages for which taxes are owed, many unscrupulous business owners try to avoid their tax burden.
Employment Tax Issues? We’re Here to Help
The penalties which can be incurred for employment tax avoidance can be extremely severe. For that reason, if you have been accused of operating an employment tax avoidance scheme, you need to immediately seek legal counsel.
At Ayar Law, we represent businesses with state and federal tax problems that require creative solutions. We focus entirely on tax problem resolutions and giving our clients the fresh start they need. We’ll work directly with you and strive to give you the best solution for your individual situation. So, if you’re having tax troubles call Ayar Law today at (248) 262-3400 for a free, no-obligation consultation.