Questionable Employment Tax Practices

MDES Warns Businesses and Individuals to Watch for Questionable Employment Tax Practices

MDES urges all businesses to resist the temptation to become involved in or victimized by unlawful activities.

The four most common types of employment tax non-compliance include:

1. Misclassifying worker status. Sometimes employers incorrectly treat employers as independent contractors to avoid paying employment taxes. Generally if the payer has the right to control what work will be done and how it will be done, the worker is an employee. Employers who misclassify employees as independent contractors will be liable for the employment taxes on wages paid to the misclassified worker and subject to penalties. For more information, go here. (Links to Worker Classification)

2. Paying employees in cash. Paying employees in whole or partially in cash is a common method of evading income and employment taxes. There is nothing wrong with compensating an employee in cash, but employment taxes are owed regardless of how the employees are paid.

3. Filing false payroll tax returns or failing to file payroll tax returns. Preparing false payroll tax returns intentionally understating the amount of wages on which taxes are owed or failing to file employment tax returns are methods commonly used to evade employment taxes.

4. S Corporation officers compensation treated as corporate distributions. In an effort to avoid employment taxes, some S Corporations are improperly treating officer compensation as a corporate distribution instead of wages or salary. By law, officers are employees of the corporation for employment tax purposes and compensation they receive for their services is subject to employment taxes.

MDES encourages employees to report any concerns that an employer is failing to properly withhold and pay federal income and employment taxes. Taxpayers can contact their local MDES Tax Field Representative