Not paying payroll taxes can result in severe civil and criminal penalties under federal and state law, for both, employers and employees. Employers have a duty to pay payroll taxes as part of their responsibilities towards the employees they hire. These employer obligations are not generally levied towards independent contractors or self-employed individuals. However, all employees, including self-employed individuals, are responsible to pay their corresponding employment taxes.
Workers may not be aware of their own legal exposure due to their employer’s non-payment of payroll tax. This liability does not reside solely with their employer. In its heightened effort to prosecute tax evasion and fraud, the Internal Revenue Service (IRS) may hold individuals personally responsible for their employer’s failure to pay payroll tax. Individuals can be held liable, whether or not they have knowledge, and whether or not they own the business, represent management, or are regular members of the labor force.
Additional employer liability for not paying of payroll taxes can arise as a result of not paying appropriate wages (including minimum wage and overtime wages) under the Department of Labor (DOL) “wage and hour” requirements. The DOL reported about $1.6 billion in back wages recovered since 2006, $2.5 million in 2015 alone, all triggering accompanying payroll tax liability.
Every pay period, employers must withhold federal income taxes, social security, and Medicare taxes, from employees’ wages. In addition, employers are responsible to pay the following employment taxes:
- One-half of social security taxes
- One-half of Medicare taxes
- 100% of Federal Unemployment Insurance Tax (FUTA)
- Florida unemployment taxes (“Reemployment Taxes”) payable to the Florida Department of Revenue
Both the employer and the employee are responsible for collecting and remitting withholding taxes to the IRS. If the employer does not withhold these taxes, or if the employee is self-employed, then the employee is responsible to pay them.
An employer is responsible for direct payment of unemployment tax to the IRS if the employer (a) pays wages totaling at least $1,500 to its employees in any calendar quarter; or (b) has at least one employee on any given day in each of 20 different calendar weeks. Employers are required to make quarterly deposits (if they pay over $500 in wages) and file annually through Form 940 (or 940 EZ) based on the number of employees the employer has.
In Florida, employers must comply with Florida Department of Revenue (DOR) periodic employee reporting requirements by filing Employer’s Quarterly Reports, via Form RT-6. This reporting impacts employee claims for reemployment assistance benefits under the Florida Reemployment Assistance Program Law, which provides temporary financial assistance to help qualified workers through the transition period to a new job, subject to eligibility.
Tax rates are set every calendar year. For 2016, the tax rates are:
- Social Security:2% (amount withheld) each for the employer and employee for a total of 12.4% (the wage base limit is $118,500).
- Medicare:45% (amount withheld) each for the employee and employer for a 2.9% total (all wages are subject to Medicare tax).
- Additional Medicare:9% additional tax for wages in excess of $200,000
- FUTA: 6% of wages up to $7,000
The IRS will investigate any violations reported and pursue civil and/or criminal sanctions independently of the employer’s state tax authorities (although they can collaborate within the investigative process in certain instances). DOL investigations may also result in increased payroll tax liability for employers.
The Florida Department of Revenue will investigate the failure by an employer to pay reemployment tax. This is an administrative process bound by deadlines, which will culminate in a hearing and a decision that can be administratively appealed to the Department of Economic Opportunity (DEO), which will issue a final order that can be contested in court, if necessary.
An employer must file appropriate returns with federal and state agencies reflecting the number of employees, as well as the tax owed and paid. Failure to file timely returns, making late payments, underpay estimated taxes, and all tax evasion and tax fraud conduct will trigger penalties. Willful acts may result in criminal liabilities.
Specifically, in addition to other penalties provided by law, any willful act to evade taxes, or willful failure to collect or truthfully account for and pay over taxes to the IRS may result in criminal liability. Upon conviction, an offender will be fined not more than $250,000 for individuals ($500,000 in the case of a corporation), or may be imprisoned for up to 5 years. Additionally, any person who willfully fails to file a return, supply information, or pay tax, may be guilty of a misdemeanor and, upon conviction, shall be imprisoned for up to 1 year, or fined up to $100,000 for individuals ($200,000 for corporations), or both, together with the cost of prosecution.
Any willful fraud and false statement conduct is punishable as a felony. The wrongdoer can be imprisoned for up to 3 years, or fined up to $250,000 for individuals ($500,000 for corporations), or both, together with cost of prosecution.
The IRS also assesses penalties against those who file frivolous lawsuits, as well as those conspiring to commit an offense. Additional penalties may apply at a state level under Florida DOR laws and as a result of wage labor law violations, under DOL laws.
Personal Liability as a “Responsible Person”
When an employer withholds taxes but fails to send the withheld money to the IRS, the agency can pursue the “responsible persons” personally, even if they have no knowledge that payments have not been made, and even if they are not owners of the employer’s business. A responsible person can be an officer, director, manager, or anyone with payment or check-signing authority. The IRS can assess a 100 percent penalty against every responsible person.
Anyone who files a tax violation report or Award for Original Information with the IRS may collect a monetary award as a whistleblower, if certain conditions are met. Whistleblowers can be awarded from 15 to 30 percent of the amount collected by the IRS resulting from an investigation. The IRS will award 15 to 30 percent of the amount collected if the disputed taxes, penalties, and interest amount to more than $2 million, or if the fraud is by an individual taxpayer with an annual gross income of more than $200,000. For lesser dollar amounts, the IRS will pay up to 15 percent of the amount collected. Whistleblower provisions also exist under other federal laws and state law.
To avoid and manage any liability resulting from payroll tax non-payment, employers, employees, independent contractors, and self-employed individuals can benefit from consulting with knowledgeable legal counsel. If an employee believes their employer is not paying payroll taxes to the government, the employee should consult with an attorney to determine their rights, responsibilities, and best course of action.
Whether you are an employer, employee, or independent contractor, the Orlando employment law attorneys of Burruezo & Burruezo can assist you in assessing a payroll tax compliance or violation situation and offer competent legal representation, if necessary. Click here to contact an attorney now.
 See Independent Contractor vs. Employee (Part 1- 4) blog article series for more information about the classification of independent contractor vs. employee.
 See Wage and Hour blog article for additional information.
 See Unemployment Benefits blog article for more information.
 See Unemployment Benefits and Workers Compensation blog articles for additional detail.
 See Wage and Hour blog article for additional information.
 See Whistleblower Laws in a Nutshell, Whistleblower Protection Act and Wage and Hour blog articles for additional information.