Each summer, many students and young adults search for part-time employment. In fact, this year the youth labor force grew by more than 2 million. Annually, from April to July, enormous amounts of high school and college students look for summer jobs, and many graduates enter the labor market to look for long-term employment.
If you recently landed your first summer job, you need to know about best business practices of your employer. The Internal Revenue Service (IRS) encourages individuals to watch for questionable employment tax practices.
“Failure to pay employment taxes is stealing from the employees of the business,” said former IRS Commissioner Mark W. Everson. “The IRS pursues business owners who don’t follow the law, and those who embrace these schemes face civil or criminal sanctions.”
There a number of reasons why employers do not withhold or pay employment taxes all together. Some business owners see it an opportunity to “borrow” money from Uncle Sam with the intention of paying it back later. “For others, it may be a situation where an employer collects the taxes and elects to keep it during a period of financial difficulty rather than pay it to the IRS. For a small number, it involves philosophical differences with the tax law of the United States that courts consistently reject. Regardless of the reason, federal law requires employment tax withholding and payment by employers,” according to a report by the Internal Revenue Service.
Employment taxes consist of several things: federal income tax withholding, Social Security, Medicare and unemployment taxes. Additionally, most states have withholding regulations for different types of employment related taxes, like contributions. The IRS warns that, “Improper reporting or payment of employment taxes affects the ease with which employees can claim future benefits from these programs.”
If an employer fails to comply with tax laws, the IRS can take a number of different actions to combat non-compliance. Some of these actions are audits, filing tax liens against property owned by the taxpayer, criminal investigations, prosecution, criminal convictions, fines and jail time.
According to the IRS’s website, “the IRS urges all businesses to resist the temptation to become involved in or victimized by unlawful activities.” Below are some reasons why an employer may not comply with tax laws.
1. Pyramiding. This is when an employer withholds taxes from its employees, but intentionally does not send them to the IRS. “An often cause is a lack of profit or capital for operating costs, so the business owner uses the trust funds to pay other liabilities. The quarterly employment tax liabilities accumulate (or “pyramid”) until the employer has little hope of catching up. Businesses involved in pyramiding frequently shut down or file for bankruptcy and then start a new business under a different name starting the cycle over.”
2. Unreliable Third Party Payers. These include Payroll Service Providers and Professional Employer Organizations. These groups are in charge of filing employment tax returns and making employment tax payments. If such companies dissipate, millions in employment taxes are gone forever.
3. Unnecessary Arguments. According to the IRS, “Unscrupulous individuals and promoters have used a variety of false or misleading arguments for not paying employment taxes. These schemes are based on an incorrect interpretation of ‘Section 861′ and other parts of the tax law and have been refuted in court.”
4. Misclassifying Worker Status. It is common for businesses to act as if employees were independent contractors to avoid paying employment taxes. “Generally if the payer has the right to control what work will be done and how it will be done, the worker is an employee,” says the IRS.
5. Paying Workers in Cash. Paying employees with cash, whether it is in full or not, is one way many employers evade taxes.
6. Filing False Payroll Tax Returns or Failing to File Any Returns. This method is a common way employers think they can get away with paying less than they owe in taxes.
If summer workers have reason to believe that their employer is doing any of these things, the IRS encourages employees to report them. Follow US Tax Shield on Twitter or Like our Facebook page for more tax news and tips.