I’ve seen startups that want to pay everyone as contractors, showing a zero in the payroll tax expense box on their US tax return. This would be a mistake!
Officials, or those with the functions of an official, should be considered employees, not contractors. (26 CFR ยง 31.3121(d)-1(b) and Joseph M. Gray Public Accountant, Pc; 119 TC 121 (2002))
* Willful failure to pay payroll tax is a crime with jail time!
* Any person responsible can be sanctioned with the penalty
*Even an employee, outside bookkeeper or CPA can be held liable
* Once assessed, a person is presumed guilty
* Penalty is not dischargeable in case of 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 issues
* It is difficult to sell or exit an entity when there are such payroll tax issues
* The IRS has been aggressive in assessing and collecting payroll tax penalties, more so than most other types of taxes.
* California passed AB5 in 2019, limiting the ability to classify workers as contractors and bringing greater scrutiny to worker classification.
Don’t get burned by this and related problems!
* Pay officials as employees
* Do not allow contractors or consultants to call themselves officers (for example, I have seen “consult CXO” on a business card, but an officer is generally considered an employee, not a consultant)
* Use a reputable payroll processor (Ask to see their “SSAE16” certification!)
* Promptly notify the payroll processor of stock options, restricted stock, other deferred or equity compensation
If there is a problem with employee classification and subsequent payment of payroll taxes, consider the availability of voluntary compliance amnesty programs, such as the Voluntary Classification Settlement Program (VCSP, Form 8952).
Move quickly to involve 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 inadvertent delay in transferring funds to his retirement fund. There was a DOL audit. His 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 complaints for his CEO.
Some small businesses recently (in 2020) discovered a new recognition of the importance of payroll, when they were unable to obtain a Paycheck Protection Program (PPP) loan as part of the Coronavirus (COVID-19) stimulus due to they couldn’t do it properly. document your payroll expense from the previous year. Many PPP loan applications were hastily prepared and applications with even minor errors were rejected, often without explanation.
Payroll, especially multistate payroll with benefits and/or payroll in local jurisdictions like San Francisco or New York City, is complicated and subject to frequent rule changes mid-year, and it’s all too easy to overlook or get the details wrong unless experienced specialists are used who handle a high volume of multiple paychecks.
If you are ever lucky enough to have a suitor from a public company looking to buy your business, they typically require prior 3 years of SSAE16 certification from your payroll processor (What, your payroll processor doesn’t have SSAE16? Most don’t!) Failing to produce this certification, or do the payroll in-house with uncertain accuracy, will likely nullify the deal as the acquiring company’s officers and directors do not want problems with their own auditors over their payroll, or personal liability as persons responsible for possible mistakes on your payroll.
Don’t risk experiencing any of these issues firsthand. Give your payroll the respect it deserves!