Tax season is when most businesses become reacquainted with the importance of having all of their business-related tax information prepared and ready for review, but organizations should be diligent in maintaining this information all year long. Failure to do so often results in slip ups and it could land you in a lengthy dispute involving negotiations with the IRS or the Federal Tax Court.
Common Employment Tax Issues
A number of employment tax issues can affect a business, but some are far more prevalent than others. The first and most common is incorrectly defining a worker as a contractor, rather than an employee.
The IRS defines a “worker” as either being:
- An independent contractor
- An employee
An employer’s tax responsibilities differ based on how the worker is classified. Employers can deduct taxes from employees’ pay, for example, but they are not able to do so when the worker is classified as an independent contractor.
What about Contractors and Subcontractors?
These individuals are generally not employees, though this is not always the case. A tax attorney will be able to provide you with further information on whether or not the person you have hired should have taxes deducted from his or her salary.
Voluntary Classification Settlement Program
Also known as the VCSP, the recently introduced Voluntary Classification Settlement Program provides taxpayers with the opportunity to voluntarily reclassify a worker as an employee. A business may do this for one of two reasons:
- For federal employment tax purposes
- To receive partial relief from federal employment taxes which are due because of any misclassified periods of employment
There are eligibility requirements associated with the VCSP. Those who want to participate must apply with the IRS and then enter into a closing agreement before they can partake in the program.
Fringe benefits are an alternative form of employee payment. A business may give fringe benefits to employees, independent contractors, directors, and partners.
All fringe benefits are taxable and must be included in the worker’s income unless the law specifically excludes it, or the recipient of the fringe benefit pays for the benefit. What does or does not constitute a fringe benefit, however, is not always clear and should be reviewed by a tax attorney.
Corporate officers are considered to be employees, and although there are statutes involving corporate officers, some S Corporations and C Corporations may not need to treat the payments made to their officers for services as wages.
Form 1099-MISC Issues
One of the most commonly used forms to report payments of $600 or more to non-employees is Form 1099-MISC. These are often incorrectly sent in to the IRS, or the forms lack pertinent information such as a worker’s Taxpayer Identification Number (or “TIN”).
Are You Involved in an Employee Tax Dispute?
Receiving a written letter in the mail from the IRS is enough to send any organization into a panic. It is important to remember that audits, reviews, and questions about tax returns are not uncommon and that if you maintain a logical and sensible approach, you may be able to reduce or even eliminate potential fines and penalties.
Get Your Documentation in Order
The first thing you need to do is to review your paperwork and make sure that you have everything the IRS needs in the timeframe expected.
Know What They Know
The IRS has already done a background check on your organization and knows just about everything about your company (i.e. if you have been sued by employees or had other IRS issues in the past). It is imperative that you are properly prepared to answer any questions that the IRS may ask.
Resolving employment tax disputes is a lengthy process, particularly as the IRS is a very large, very busy organization, and your business is not likely to be their first priority. As stressful as this may be, business owners and partners need to keep their cool throughout this arduous process.
Hire Tax Counsel
As the tax dispute continues, there will be probing questions asked about your business which can be difficult for you to answer, particularly since the process can take up to half a year or longer to complete and certain details may be forgotten.
A tax lawyer like Scott Scammahorn is able to respond to the in-depth questions presented by the IRS while also being able to provide ongoing insightful information regarding employee taxes and worker classification. Not only does the Scammahorn Law Firm, P.C. have the knowledge and background necessary to protect your rights, but their experience has resulted in exemplary results for their clients who have faced a wide scope of IRS-related issues.
If you are facing, or are in the midst of, an employment tax dispute, we invite you to arrange for a consultation with one of our experienced tax attorneys here in East Texas at (903) 595-1000.