Why do we strain out the knat and swallow the camel? When the law is plain and the consequences of failure to follow the law are great, there may remain the desire to skirt the issues. What could be easier to understand than the law relative to employees vs. self-employed? Basically, if the employer has the ability to set the work hours, the pay per hour and the work to be done, that worker is an employee. If the worker is called to do a specific task and that worker is employed by another company, [exterminator, lawn maintenance, etc.] that worker is not an employee of the customer. If a person works under the auspices of the management of a company and performs a service [over-the-road truck driver, taxi driver, farm hand, kitchen help, restaurant server, etc.] that worker is an employee of a business and should receive a W-2 form. So what is the problem? Why do “employers” misunderstand this very simple structure? They do not misunderstand it, they chose to play ignorant. Employees have certain rights. An employee understands that the employer will pay a certain wage, withhold income taxes and employment taxes [social security and medicare] and the employer will match the employment taxes and be responsible for paying those, along with withheld income taxes, to the taxing authorities. If a business fails to pay the withheld income and employment taxes of its employees, the Internal Revenue Service can and will go after “responsible persons”—those responsible for collecting and paying the taxes. The penalty on a responsible person (the trust fund recovery penalty) is 100 percent of the unpaid tax. For the penalty to apply to an individual, it must be shown that the individual’s failure to pay was “willful.” After reading this article, is there any question as to the responsibility of the employer? Can you truly say, “I did not know better?” Willful means you knew the correct way to respond to the task, but chose to ignore it. The blame game began in the Garden of Eden. Adam said, “The woman you gave me, enticed me to eat of the tree.” Adam knew what God had said, but chose to play dumb. The consequences of that act have plagued humans through time immemorial.
In a recent article in a tax publication, the writer discussed a case where the tax court found that a doctor was a responsible person when he loaned $100,000 to his medical practice, to pay its employees. The payment was made at a time when the practice owed over $10 million in unpaid payroll and withholding taxes, due to embezzlement by its chief financial officer. The IRS assessed $4 million against the doctor as a responsible person. The doctor filed a motion for reconsideration pending the government’s counterclaim against the CFO, also a responsible person.
Although the doctor conceded he was a responsible person, he argued that he acted morally and generously in using his own money to provide for practice’s employees. However, the fact that he did so after knowledge of the taxes due the IRS meant that he acted willfully, according to the court. He had the burden to prove he was not a responsible person or did not willfully fail to pay the taxes owed. Since he failed to prove this at the summary judgment stage, the court denied his motion for reconsideration.
Do not deceive yourself; failure to pay taxes is not a game. If you are an employer and you misclassify your employees as self-employed and provide them with a Form 1099, your days are numbered before you will be discovered. How will you be discovered? If any of your “employees” are audited by the IRS, the Service will follow the tracks back to you. We warn our clients about the probability of such action. Playing the ignorance card is a dangerous game. Please head the warning and become compliant before you are embarrassed by a conflict with the IRS. Without regard to the fines, the embarrassment is a tragedy. You have been warned, get right or get fined and embarrassed.
For more information, call Wilson & Wilson, PC, CPA, CFE at 615-673-1330 or email firstname.lastname@example.org