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.
How Do Employers Evade Taxes?
Employment tax evasion schemes can take a variety of forms. Some of the more prevalent methods of evasion include pyramiding, employee leasing, paying employees in cash, filing false payroll tax returns and failing to file payroll tax returns:
- Pyramiding -An employer collects employment taxes from its employees but fails to pay those taxes over to the IRS. Instead, the taxes are spent on business or personal expenses.
- Employee Leasing or Third-Party Payers - An employer legally contracts with an outside business to manage the payroll for its employees. The employee-leasing company collects employment taxes from the employees but fails to pay those taxes over to the IRS. Instead, the taxes are spent on business or personal expenses.
- Paying Employees in Cash - Employers can legally pay their employees in cash. Some employers pay employees in whole or partially in cash in order to evade employment taxes without leaving a paper trail of evidence. However, the IRS says that it can prove employment tax evasion even without a paper trail.
- Filing False Payroll Tax Returns or No Payroll Tax Returns at All - Employers file false payroll tax returns that understate the amount of wages paid to the employees and the amount of taxes are owed. Or, the employers simply fail to file any payroll tax returns altogether.
- Inaccurate Worker Status and Wages - Employers intentionally misclassify employees as independent contractors to avoid paying employment taxes. Or, small businesses misclassify the wages and salaries paid to its executive officers as corporation distributions to avoid paying employment taxes on those monies.
How Can Employees Prevent Employers Tax Schemes?
Employees should watch for employers engaging in fraudulent conduct when paying employees because the employees may suffer from the scheme by not being able to collect unemployment, social security, and medicare benefits. 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 misconduct.
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 Can 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 tax lawyer immediately to learn more about your rights, your defenses and the complicated legal system. If you are an employee suspecting a employer engaging in misconduct you may also benefit from contacting a lawyer to assist you in preventing the employer in future misconduct.