Employment Tax Evasion Scams

Employment tax evasion is a form of fraud where employers either deliberately fail or underreport their employment taxes. These taxes include federal income tax, Social Security, and Medicare taxes that must be withheld from employees’ wages and the employer’s share of Social Security and Medicare taxes.

How Do Employers Evade Taxes?

Several tactics can be employed for tax evasion. Common methods include:

Misclassifying Workers

One of employers’ most prevalent methods to evade employment taxes is misclassifying their employees as independent contractors. By doing so, employers can circumvent the responsibility of withholding federal income tax, Social Security, and Medicare taxes.

For example, consider a tech company that hires a web developer. Instead of classifying them as a full-time employee and offering benefits and regular wages, they list the developer as an independent contractor despite the developer working regular hours and using company resources. This way, the company avoids paying certain employment taxes, and the developer is left to pay self-employment tax, which can be significantly higher than if they were classified correctly.

Paying in Cash

The allure of a cash transaction for some employers is that it leaves no paper trail. Some businesses, especially in industries like construction or hospitality, might offer employees wages in cash.

This “under the table” method might seem beneficial initially, as employees receive money without immediate deductions. However, this could backfire for the employee during tax season or when trying to prove income for credit applications.

For instance, a restaurant might pay its waitstaff their wages in cash at the end of each shift. While the waitstaff might leave with money in hand, they may not receive a W-2 or 1099 form at the end of the year, making tax filing complicated and possibly putting them at risk.

Falsifying Tax Statements

Creating fraudulent tax statements is a direct violation of tax laws. An employer might manipulate figures on a W-2 and other tax statements to indicate that an employee received a lower wage than they did.

For instance, an employee earning $50,000 might only see $30,000 reported on their tax statements, reducing the employer’s tax obligations. This discrepancy can create significant tax complications for the employee, especially when audited.

Failing to File

The most blatant form of tax evasion is not filing employment tax returns. An employer intentionally avoids their tax obligations by choosing not to submit these crucial documents.

For example, a small business owner might neglect to file quarterly employment taxes, believing their operation is under the radar. However, the IRS has systems in place to detect such evasion, and when discovered, the penalties can be severe, including heavy fines and potential legal action.

How Can Employees Prevent Employers’ Tax Schemes?

Employees can safeguard themselves and ensure compliance with tax laws:

Regularly Review Payslips

It’s wise for employees to develop a habit of examining their payslips carefully. Employees can confirm that appropriate amounts are being withheld for federal income tax, Social Security, and Medicare benefits. Regular reviews ensure discrepancies or errors are caught early, allowing for timely corrections.

For instance, if you notice a sudden decrease in your tax deductions without a corresponding decrease in salary or a change in your tax bracket, it might indicate an issue. To do this effectively, familiarize yourself with typical deductions, compare payslips month-to-month, and consider using online tools or apps that help track and analyze payroll deductions.

Verify Classification

Misclassification can lead to significant tax implications for workers. If you’ve been classified as an independent contractor but find yourself adhering to strict work hours, using company resources, or operating under the employer’s direct control like regular employees, you might be misclassified.

Addressing the issue involves understanding the legal differences between contractors and employees. If there’s doubt, initiate a conversation with the HR department or your direct supervisor. If the issue persists, you may seek guidance from an employment attorney or the Department of Labor, which offers criteria and tests to determine the correct classification.

Request Tax Statements

Every employee has a right to receive a clear breakdown of their annual earnings and deductions through tax statements like the W-2. It’s not just about waiting for it to arrive; be proactive.

Mark your calendar for late January, as employers must send out W-2 forms by January 31st. Contact your HR department or payroll division if you haven’t received it by mid-February. Having this statement is crucial not only for your tax filing but as a record of your earnings and withheld amounts.

Report Suspicious Activity

If you suspect that your employer is involved in employment tax evasion practices, it’s in your best interest — and a civic duty — to report it. While it may feel daunting, whistleblowers have certain legal protections against retaliation. Start by documenting any evidence or discrepancies. The IRS provides a specific form (Form 3949-A) for reporting suspected tax fraud.

By filling out and submitting this form, you provide the IRS with the necessary information to investigate. Additionally, the IRS Whistleblower Office might reward whistleblowers if their information leads to the collection of taxes, penalties, and other amounts.

By understanding and spotting these signs of tax evasion, employees can protect their rights concerning immediate wages and deductions and their ability to collect unemployment and other benefits in the future.

Can an Employee Be Held Liable for Employment Tax Evasion?

Generally, the primary responsibility for employment tax evasion falls on the employer. However, if an employee is found to be complicit or aiding in the evasion, they might be held accountable. For instance, if an employee agrees to accept payments under the table and does not report these earnings when filing personal income taxes, they may be liable for tax evasion.

Accepting payments “under the table” might seem advantageous in the short term, as employees receive the full wage amount without immediate tax deductions. However, this practice has significant long-term risks for the employer and the employee.

For employees, taking payments without any record means they are essentially receiving unreported income. While the immediate influx of cash can be tempting, there are a few considerations and consequences to keep in mind:

• Tax Liability: Even if an employer does not withhold taxes, the employee is still responsible for paying income tax on all earnings. Employees who do not report these earnings when filing personal income taxes could be found guilty of tax evasion. Tax evasion is a federal crime that can result in penalties, interest on owed taxes, and even imprisonment.
• Lack of Employment Benefits: Unreported income means no contributions are being made to Social Security or Medicare on the employee’s behalf. Over time, this can affect an individual’s entitlement to these benefits in the future.
• Legal Vulnerabilities: In a dispute over wages or wrongful termination, having no official employment record or income can leave an employee without legal recourse. Without proper documentation, asserting one’s rights or claims becomes challenging.
• Potential Complicity: Employees who knowingly accepted under-the-table payments might also be scrutinized if an employer is investigated or audited by tax authorities. While primary legal responsibility might fall on the employer, employees could also face consequences for being complicit in the evasion scheme.
• Financial Limitations: With no proof of income, employees might find it challenging to apply for credit, loans, or rentals, as many institutions require proof of steady income.

In essence, while receiving payments without tax deductions might initially seem like a financial boost, the potential legal and financial ramifications can be severe. It’s always best for employees to understand their rights and responsibilities concerning taxable income and to engage in transparent, legal employment practices.

What Can I Do If I Am Accused of Tax Evasion?

If you are accused of tax evasion, seek legal counsel immediately. A knowledgeable tax lawyer can review the circumstances, advise on the best action, and represent you in any proceedings. Employment tax laws can be complex, and the consequences of evasion can be severe, including hefty fines and potential imprisonment.

Considering the intricacies involved, having an attorney in your corner is crucial. Contact a tax lawyer through LegalMatch to ensure your rights are protected, and you receive the best possible representation.