4 Myths About Payroll Taxes

After years of working with or working for scores of employers, I’ve noticed four myths that commonly observed throughout most small to mid-size companies. Here is the reality: 

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

Reality: Yes, it is true that more often than not it costs less to use an independent contractor than to have an employee on staff, but this only works in highly specific circumstances.  As an employer, 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:

The worker is free from the control and direction of the hirer in connection with performing the work

The worker performs work outside of the usual course of the hiring entity’s business

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.  

 

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: 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  it can be applied to business owners even if they have corporations or LLCs.

 

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