Federal law requires employers to withhold federal income tax, Social Security and Medicare taxes from their employees' paychecks and send the money to the Internal Revenue Service (IRS). Federal and state laws also require businesses to pay an additional unemployment tax. An employer's failure to pay these taxes to the IRS is employment tax evasion. Employment tax evasion schemes can take a variety of forms:
- Pyramiding: "Pyramiding of employment taxes is a fraudulent conduct where a business withholds taxes from it's employees and fails to report them to the IRS as taxable income.
- Employment Leasing: A practice of contracting with an outside business to handle all business administration and payroll of employees and the leasing company fails to pay over to the IRS any portion of collected employment taxes
- Paying Employee in Cash: Paying employees in cash is a common way to evade income and employment taxes resulting in lost tax revenue to government and loss of benefits to employee.
- False Payroll Tax Returns: Employer prepares false reports of payroll to minimize tax bill
How Does an Employee Know Whether or Not an Employer Is Evading Taxes?
There are several ways an employee can determine whether an employer is paying taxes withheld from paychecks:
- Paycheck stubs should have lines reporting which taxes have been withheld
- W-2 and tax statements should show which taxes have been withheld
If the employer is not withholding taxes from the employee, the employee is ultimately responsible for paying those taxes. The IRS urge employees to watch for and report any payroll tax evasion and fraudulent conduct committed by employers.
What Happens If an Employer Is Convicted of Employment Tax Evasion?
Employers who fail to pay taxes or to properly report taxes face criminal and civil sanctions, including fines and even prison time. Evading employment taxes can have a serious consequence for employers and employees. Employees may also suffer because they may not qualify for social security, medicare, or unemployment benefits when employers fail to report or ay employment and unemployment taxes.
Can an Employee Be Held Liable for Employment Tax Evasion?
If an employer fails to pay employment taxes, and the IRS is unable to collect these taxes from the employer, the employee is ultimately responsible for his or her share of the federal income tax and Social Security and Medicare taxes.
An employer's failure to report or pay taxes to the IRS ultimately hurts the employee, who may not be able to claim Social Security, Medicare or unemployment benefits in the future.
What If I Am Self-Employed?
Individuals who are self-employed must still pay federal income tax, Social Security and Medicare taxes. Self-employed persons who engage in employment tax evasion are also subject to criminal and civil penalties. If your are self-employed you must make sure to report all your business expenses and all your income that you have received from your business that is taxable. Proper record keeping will help self-employed individuals from avoiding tax evasion and tax fraud.
What Should I Do If I Am Accused of Tax Evasion?
If you have been accused of tax evasion or you are facing an audit, you should speak to a criminal lawyer immediately to learn more about your rights, your defenses and the complicated legal system.