I’ve seen startups wanting to pay everyone as contractors, showing a zero in the payroll tax expense chart on their US tax return – this would be a mistake!
Officers, or those with the duties of an officer, should be considered employees, not contractors. (26 CFR § 31.3121 (d) -1 (b) and Joseph M. Gray Certified Public Accountant, PC; 119 TC 121 (2002))
* Deliberate failure to pay payroll taxes is a crime With jail time!
* Any responsible person can be assessed with the penalty.
* Even an employee, outside accountant, or CPA can be held liable
* Once assessed, a person is presumed guilty
* The penalty is not dischargeable in bankruptcy.
* There is no statute of limitations for unfiled payroll tax returns
* Officers, directors and responsible persons have personal responsibility
* It’s hard to hire good people when there are such payroll tax problems
* It is difficult to sell or leave an entity when there are such payroll tax problems.
* The IRS has been aggressive in assessing and collecting penalties for payroll taxes, more so than with most other types of taxes
* California passed AB5 in 2019, which limits the ability to classify workers as contractors and leads to increased scrutiny of the classification of workers.
Don’t get burned by this or related problems!
* Pay officers as employees
* Do not allow contractors or consultants to call themselves officers (eg, I have seen “CXO consultant” on a business card, but an officer is generally considered an employee, not a consultant)
* Use a trusted payroll processor (Ask to see their “SSAE16” certification!)
* Timely notify the payroll processor of stock options, restricted shares, other deferred compensation, or shares.
If there is a problem with employee classification and underpaid payroll tax, consider the availability of voluntary compliance amnesty programs such as the Voluntary Classification Agreement Program (VCSP, form 8952).
Act quickly to hire professionals to fix this type of problem. Tax problems, in general, do not improve with age and are not easily solved without the help of an expert.
A client of mine once had a slight involuntary delay in transferring funds to his retirement fund. There was an audit from the DOL. Its fine was less than $ 200, but the staff time required to investigate the problem and generate the necessary corrective paperwork cost more than $ 10,000 with significant personal stress and pain for its CEO.
Some small businesses have recently discovered (in 2020) a new recognition of the importance of payroll, when they were unable to obtain a loan from the Paycheck Protection Program (PPP) as part of the Coronavirus (COVID-19) stimulus due to They were unable to properly document their payroll expenses from the previous year. Many APP loan applications were hastily prepared and applications with even minor errors were rejected, often without explanation.
Payroll, especially multi-state payroll with benefits and / or payroll in local jurisdictions like San Francisco or NYC is complicated and subject to frequent rule changes in the middle of the year, and the details are very easy to lose or get wrong unless you are use experienced specialists who handle a large volume of multiple paychecks.
If you are ever lucky enough to have a suitor from a public company looking to buy your business, they usually require 3 years prior SSAE16 certification from your payroll processor (What, your payroll processor doesn’t have SSAE16? Most do not!) Not being able to produce this certification, or do the payroll internally with uncertain precision, will likely kill the deal, as the acquiring company’s officers and directors do not want problems with their own auditors over their payroll, nor personal liability as responsible persons for potential errors on your payroll.
Don’t risk experiencing any of these problems first-hand. Give your payroll the respect it deserves!