Payroll Tax Audits: What You Need to Know

If you’re a business owner, it’s important to understand the potential consequences of a payroll tax audit. These audits occur when the IRS investigates a business’s payroll taxes to determine whether they have underpaid. It’s a serious matter that can result in catastrophic financial consequences.

Understanding Payroll Tax Audits

The IRS typically conducts payroll tax audits over a period of three years. However, if you’ve never filed a Form 941 or other employment tax paperwork, the IRS can audit decades of financial information. There is no statute of limitations, so it’s crucial to stay on top of your payroll taxes.

If you only hire independent contractors, you are more likely to face a payroll audit than if you have a mix of employees and contractors. If the IRS disagrees that your contractors are truly independent, your business will be subject to payroll taxes. There are additional potential consequences to having independent contractors labeled as employees as well.

The Financial Impact of a Payroll Tax Audit

If you are determined to owe payroll taxes, the financial impact can be catastrophic. The level of financial liability will depend on the specifics of your case, but you will likely need to pay back taxes, interest, and any penalties imposed by the IRS. Failure to deposit, failure to file, and accuracy penalties are just a few examples of potential penalties. In some cases, you may be subject to several of these penalties at once, resulting in more than 50 percent of the original total owed, plus interest.

Triggers for Payroll Tax Audits

Payroll tax audits can be triggered by computer software flagging potential issues or by complaints filed with the IRS. Unhappy contractors may file complaints with the IRS when they’re unable to pay a self-employment tax, which can result in an investigation into whether they qualify as a contractor or an employee.

If the IRS reaches out to you about your payroll taxes or your employee contracts, it’s a good idea to get in contact with an experienced tax attorney. A skilled tax attorney might be able to avoid having an audit opened at all by filling out an official Form SS-8, which allows you to answer questions about your contractors and employees.

Understanding the Difference Between Contractors and Employees

There are some key differences between contractors and employees that not every business owner understands. It’s not enough to simply state in the contract that someone is a contractor rather than an employee. When the IRS decides whether to classify someone as an employee or contractor, they use a “common law” test that examines 20 different factors. Most recently, the IRS has started using a test with three categories. These are the relationship of the worker to the business, the level of financial control exerted, and the level of behavioral control exerted.

Proving Your Case

If you’re the subject of a payroll tax audit, it’s important to prove that you employ contractors rather than employees. Tax attorneys understand the differences between these groups and can compile evidence to prove your case. If you have found yourself convicted of payroll tax avoidance after an audit, an attorney can help you appeal. They will either represent you in court or appeal the ruling to the Appeals Division of the IRS.

When you can’t prove definitively that you employ contractors, you still have some legal options. Legislation passed several decades ago provides relief to business owners who hire contractors that don’t pass the 20-part test, making it easier to appeal an IRS judgment.

Conclusion

If you’re facing a payroll tax audit, the consequences can be dire. It’s important to understand the difference between contractors and employees and to have evidence to prove your case. It’s also crucial to have a skilled tax attorney on your side who understands the nuances of tax law and can advocate for you. At Spodek Law Group, our experienced attorneys, led by Todd Spodek, have helped countless clients navigate payroll tax audits and other tax-related issues. We understand the importance of protecting your business and your livelihood, and we’ll work tirelessly to help you achieve the best possible outcome. Don’t wait until it’s too late – contact us today to schedule a consultation and learn how we can help you with your payroll tax audit.

Why Choose Spodek Law Group?

At Spodek Law Group, we have a team of experienced and dedicated attorneys who are well-versed in tax law and can handle a wide range of tax-related issues. We understand that every case is unique and requires a tailored approach, and we will work closely with you to develop a strategy that best suits your needs.

We have a proven track record of success, and we are committed to achieving the best possible outcome for our clients. We understand the financial and emotional toll that a payroll tax audit can take on you and your business, and we will work tirelessly to protect your interests.

Our team is responsive and accessible, and we are always available to answer your questions and address your concerns. We believe in providing our clients with high-quality legal services and exceptional customer service.

Contact Us Today

If you’re facing a payroll tax audit, don’t wait – contact Spodek Law Group today to schedule a consultation. Our skilled attorneys can help you navigate the audit process and protect your business and your livelihood. We are committed to providing you with the guidance and support you need to achieve the best possible outcome.