If you want to grow your business, you’ll likely need to hire employees to help you. Becoming an employer and expanding your staff comes with many responsibilities, including managing payroll taxes. Unfortunately, there are many myths about these taxes. Here’s the truth:
1. **Myth: It’s easy to save on payroll taxes by classifying employees as independent contractors.**
**Reality:** Using independent contractors might seem cheaper because you don’t have to cover payroll taxes, insurance, or benefits for them. However, you can’t just reclassify an existing employee as an independent contractor to save money. The IRS and other government agencies closely monitor such reclassifications. Whether a worker is an employee or an independent contractor depends on various factors, mainly revolving around control. If you control when, where, and how work is done, you likely have an employee. The IRS uses three categories to determine this: behavioral, financial, and the type of relationship. Some states, like California, use an ABC test to make this determination:
– The worker is free from control and direction in performing the work
– The work performed is outside the usual course of the hiring entity’s business
– The worker is engaged in an independently established trade, occupation, or business related to the work performed for the hiring entity
2. **Myth: All tax-free benefits are exempt from payroll taxes.**
**Reality:** While employees don’t pay income tax on tax-free fringe benefits, employers aren’t exempt from payroll taxes. For instance, employee 401(k) contributions made through salary reductions are still subject to FICA. Additionally, adoption assistance is tax-free for employees and exempt from income tax withholding, but it’s still subject to FICA and FUTA taxes. You can check IRS Publication 15B for details on the tax treatment of various fringe benefits.
3. **Myth: Employment taxes can be paid with your quarterly employer tax return.**
**Reality:** Generally, you must deposit federal income taxes withheld and both the employer’s and employee’s shares of FICA using the Electronic Federal Tax Payment System (EFTPS). FUTA tax deposits are required for any quarter where the tax due exceeds $500.
4. **Myth: Outsourcing payroll to a service provider frees you from liability.**
**Reality:** Many businesses outsource payroll to external service providers to handle tax calculations, withholdings, and filings. However, if the payroll service fails to remit taxes or file on time, you’re still responsible. You can sue the provider or file a complaint with the IRS using Form 14157 if you suspect fraudulent activities, but this doesn’t absolve you of your obligations to the government.
5. **Myth: Incorporating protects you from liability for unpaid employment taxes.**
**Reality:** Incorporation or forming an LLC doesn’t guarantee personal liability protection. If you’re responsible for withholding, accounting for, or depositing employee taxes and fail to do so, you can be held personally liable. This is known as the trust fund recovery penalty, and it applies to business owners even if they have incorporated or formed an LLC.
**Final Thought:** Besides federal payroll tax obligations, you may also have state-level employment taxes to handle. For more information on federal employment taxes, check with the IRS. To understand your state and local obligations, consult your state tax or revenue department.
