If you want to grow your business, you probably need to hire employees to help you. Becoming an employer and expanding your staff entails many responsibilities, one of which is seeing to payroll taxes. Unfortunately, there are many myths about these taxes. Here is the reality:

Calculating Property Value With Capitalization Rate

1. Myth: Transforming employees into independent contractors to save on payroll taxes is easy

Reality: You probably know that it costs less to use an independent contractor than to have an employee on staff. The reason: the cost of payroll taxes, along with insurance and benefits apply only for employees. But don’t think you can simply reclassify a worker who’s been your employee as an independent contractor. The IRS, as well as other government agencies, are on the lookout for just such action.

The classification of a worker depends on many factors, most of which boil down to a matter of control. Essentially, if you have the right to say when, where, and how work gets done, you’re likely dealing with an employee. The IRS uses three categories of factors to assess the degree of control: behavioral, financial, and type of relationship. Many states, including California, use an ABC test:

  1. The worker is free from the control and direction of the hirer in connection with performing the work
  2. The worker performs work outside of the usual course of the hiring entity’s business
  3. The worker is usually engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity

2. Myth: All tax-free benefits are exempt from payroll taxes

Reality: Receiving tax-free fringe benefits means that employees do not have to pay income tax on what they receive. However, it does not mean that employers are off the hook for payroll taxes. For example, 401(k) contributions made by employees through salary reductions are still subject to FICA. And adoption assistance is exempt from income tax withholding because the benefit is tax free to employees but is still subject to FICA and FUTA taxes. You can find a list of various fringe benefits and their tax treatment for employment tax purposes in Table 2-1 in IRS Publication 15B.

3. Myth: You can pay employment taxes with your quarterly employer tax return

Reality: In general, you must deposit federal income taxes withheld and both the employer and employee share of FICA with the U.S. Treasury using the Electronic Federal Tax Payment System (EFTPS). Also, deposits are required for FUTA tax for the quarter within which the tax due is more than $500.

4. Myth: Outsourcing to a payroll service provider relieves you of liability

Reality: Rather than handling payroll in-house, many businesses use an outside payroll service provider to handle the chore of computing payroll taxes, withholding them from employees’ paychecks, remitting payroll taxes to the government, and filing employment tax returns. What happens if a payroll provider fails to remit your money to the government? Or it fails to timely file employment tax returns? Unfortunately, you’re still on the hook for these obligations. You may have a lawsuit against the payroll service provider for theft, breach of contract, or other bad action. You can even file a complaint with the IRS on Form 14157 If you suspect your payroll service provider of improper or fraudulent activities regarding the deposit of your taxes or the filing of your returns. But it doesn’t relieve you of your obligations to the government.

5. Myth: Incorporating relieves you of liability for unpaid employment taxes

Reality: You may think that having incorporated your business or formed a limited liability company (LLC), you have complete personal liability protection. You don’t. If you are a person responsible for withholding, accounting for, or depositing withheld employee taxes (their income tax withholding and their share of FICA) and you willfully fail to do so, you can be held personally liable for all of these taxes, plus interest. This is called a trust fund recovery penalty and it can be applied to business owners even if they have corporations or LLCs.

Final thought

In addition to any federal level payroll tax obligations, you may also have state-level employment taxes to consider. Find out more about federal employment taxes from the IRS. Check with your state tax or revenue department to learn about your obligations on the state and local levels.


At Nugent & Associates, we're not just number crunchers. We bring over 3 decades of invaluable certified public accounting and tax expertise to your company – serving as business and financial strategists who can offer such services as tax and financial planning, investment advice, diligent financial records, and help with estate planning.

Even better, we will give you time to focus on what you do best: running the day-to-day operations that drive your business toward success.

Take advantage of our FREE and no obligation business checkup.

We will visit you at your business at a time and day convenient for you, analyze your numbers, discuss your goals and concerns and report back with a complimentary detailed written analysis to help your business succeed!

At Nugent & Associates, we're not just number crunchers. Our people bring decades of invaluable certified public accounting and financial and tax expertise to you – offering tax and financial strategies to individuals such as yourself. If you have any questions or concerns about your own tax, financial or investment matters, please do not hesitate to contact us.

Experienced tax and financial experts are not just for the super rich. At a reasonable fee you too can maximize your wealth and receive professional guidance for retirement, and/or any tax issues you may be facing, no matter your situation, with a tax and financial expert as your consultant.

Contact Nugent & Associates today. We don't charge for phone calls. You may just find you found an ally in your quest to have a great financial future.

After all, at Nugent & Associates, we succeed when you succeed!


Disclaimer:

PLEASE READ THE FULL TERMS AND CONDITIONS OF THIS WEBSITE BEFORE USING THIS WEBSITE.

This page is intended to be informational. This website, nor any of the information contained on this site constitutes professional, business, tax or legal advice and is not a substitute for such advice nor does it create a professional-client relationship between you and Nugent & Associates.

State and federal laws change frequently, and the information in this page may not reflect your own state’s laws or the most recent changes to the law.

The information contained within this website should not be considered as a solicitation or an offer for a professional-client relationship. Materials contained in this website are of a general nature and should not be substituted for professional advice. Nugent & Associates is providing this website and the information contained herein only as a convenience to you. Nugent & Associates assumes no liability or responsibility for any errors or omissions contained within this website. There is no guarantee that the information included on this site is current, accurate, complete, useful, or reliable.

Tax Planning & Preparation

We assist our clients in individual and business tax planning throughout the year.

Nugent & Associates provides:
  • Year-Round analysis to ensure a smooth and predictable year-end close.
  • Assist in establishing retirement planning.
  • Performs in-depth review of all deductions available.

Monthly/Quarterly
Financial Statements


Nugent & Associates offers outstanding accounting services and acts as a quasi-controller for companies who do not employ their own full-time accountants.

This allows our clients with more time to focus on new services, new customers and other core business issues.

Business Planning, Budgeting
& Growth Strategies


Nugent & Associates assists it clients with:
  • Starting a new venture, product or service
  • Expanding a current organization, product or service
  • Buying a new business, product or service
  • Turning around a declining business

QuickBooks Training
& Support Services


As Certified QuickBooks Professional Advisors, we can be of assistance with QuickBooks accounting or payroll and help increase your productivity and efficiency.