Many small business owners struggle with recording payroll correctly in all their tax documents. With complex and often changing IRS guidelines, it’s easy to make a mistake if you aren’t a tax law professional. These errors can trigger a stressful IRS audit and possible penalties. Moreover, the IRS could discover that you owe payroll tax and initiate a lien against your company until you repay your tax debt.

Consulting a tax attorney or another tax professional can help avoid the issues we discuss below. 

Remote Employees in a Different State

If your company runs a remote setup, some of your employees may live and work in a different state. It’s also possible that your workers perform part of their work duties outside state borders. Tax terminology defines this situation as nexus.

As an employer, you must comply with the payroll guidelines of the state where your employees work. In some situations, your business may have to withhold income tax for two states. Fortunately, some states have reciprocal agreements that allow withholding income tax only for the state where the worker lives.

Every state has different rules about what counts as nexus. This can complicate matters, since you might be unsure whether your business activities mean you have nexus in another state. Moreover, you need to figure out how tax withholding works for each state where you have nexus. A tax attorney or a CPA can help you ensure compliance.

Employee Misclassification

Today, many businesses hire independent contractors. This model can offer a lot of flexibility and also help you avoid legal liability in some scenarios. However, you can’t simply list a worker as an independent contractor rather than a W-2 employee because it’s more convenient. 

Misclassifying employees as independent contractors is a serious mistake that hurts both workers and businesses. If the IRS determines your businesses listed employees as contractors, you could be liable for back taxes and penalties for all the state payroll taxes you didn’t pay. 

How do you determine whether a worker is an employee or an independent contractor? Generally, if you control the worker’s job location and hours, cover their expenses and equipment, and pay them a consistent salary, you should probably classify them as a W-2 employee. If in doubt, consult a CPA or a tax attorney to avoid mistakes. 

Tax Reporting Errors

Tax form mistakes are common, especially as your business grows and you hire more employees. Even if you’re acting in good faith, you could list the wrong payroll amounts, include the wrong personal information, or miss deadlines.

Miscalculating payroll could lead to penalties for your business and problems for your workers. For instance, your Form 941 must match the employee’s W-2 form, or their tax refund processing could run into delays. What’s more, if you miss a deadline, penalties start adding up even if you’re only a few days late.

Reliable payroll software could help you avoid tax form errors. You should also double-check payroll amounts, make sure you list correct and complete information, and keep up with IRS guidelines. If you discover you made a mistake on a tax form, submit an amended return ASAP.

What If It Turns Out You Owe Payroll Taxes?

Payroll tax debt won’t go away. The IRS will target your business with levies and liens until you’ve paid what you owe. This can be a stressful, expensive process that jeopardizes your business. Some business owners may even face criminal charges for tax debt.

On the bright side, if you hire a taxation attorney well-versed in IRS representation, it’s often possible to negotiate a viable payment plan. Your payment plan could allow you to repay your tax debt gradually so that you still have enough cash flow to run your business and pay current taxes.

It’s important to be proactive and call an experienced tax attorney as soon as you realize the IRS suspects your business of non-compliance. Choose a reputable law firm with a proven record of successful tax dispute resolution. 

Consult a Tax Lawyer Today To Avoid Payroll Pitfalls

As a business owner, you want to avoid IRS audits, tax debt, and costly penalties. At Murray Moyer, we make sure all your tax forms comply with IRS guidelines for your full peace of mind. If you’re already facing an audit or a collection process, our tax litigation professionals can help you work out an acceptable solution. 

Call 919-846-6779 or contact us online to talk to a tax attorney today.