Articles Posted in California Payroll Tax Problems

Most, if not all, Payroll Protection Program (PPP) borrowers are focused on the question of whether they will be able to have their PPP loan forgiven.  Many questions have arisen, and some but not all, have been answered by the Loan Forgiveness Application and instructions   released by the SBA on Friday, May 15, 2020.  Here are some of the highlights.

  • Annual “cash” payroll costs are capped at $100,000 per employee. While this is not news, the SBA calculates that this amount on a pro-rata basis for the 8 week “Covered Period” is $15,385. If you do the math, that is equal to 8 weeks per year divided by 52 weeks multiplied by $100,000. Some were hoping that those on a semi-monthly pay schedule could use a larger amount based upon 24 pay periods per year. Apparently not.
  • Alternative Payroll Covered Period. The Covered Period is generally eight weeks (actually 56 days) beginning on the date the loan is first funded. The Alternative Payroll Covered Period is only for employers with bi-weekly or more frequent payroll schedules. Therefore, it doesn’t appear to apply to employers who pay semi-monthly. It begins on the on the first day of the first payroll period following the PPP Loan Disbursement Date and ends 56 days later.  The following example is provided:  Alternative Payroll Covered Period: “… if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the  Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.”  This suggests that one cannot include payments for a payroll period that begins before the PPP Loan Disbursement Date but is paid after that date. However, that is inconsistent with the Press Release issued concurrently by the SBA which states that the form and instructions provide “Flexibility to include eligible payroll and non-payroll expenses paid OR incurred during the eight-week period after receiving their PPP loan.” (emphasis supplied).  See more below.

In Greek mythology, King Sisyphus is punished by the gods and forced to roll a huge boulder up a hill only for it to roll down as it nears the top. No matter how much effort Sisyphus puts into attempting to push the boulder over the crest of the hill, it always come tumbling back down. He is doomed to push the boulder up the hill for all eternity. Sometimes collecting payroll taxes can be a “Sisyphean task” for the IRS. At least, that is what the 11th Court of Appeals wrote in a recent decision.

United States v. Askins & Miller Orthopedics, involved a private medical practice which refused to pay payroll taxes. The IRS first tried to negotiate an installment agreement with the medical practice’s business owners, but the business owners would ultimately renege on any agreement. Then the IRS issued a tax levy on property held by the medical practice in various entities, but the business owners would simply shift property to new entities out of reach of the power of the levies. Believing it was out of options, the IRS requested a permanent injunction from the district court to compel the taxpayers to perform and pay their employment taxes now and into the future.

The district court rejected the IRS request because the court argued that the IRS had yet to suffer irreparable harm. The district court reasoned that the IRS could still sue for monetary damages once the taxpayers again failed to pay their employment taxes. This is in spite of the fact that the district court conceded that the taxpayers exhibited a pattern of unlawful conduct likely to persist. In other words, the taxpayers would continue to find ways to not pay their taxes.

payroll tax problems
As a California  employer, you are responsible for making payroll tax payments to the California Employment Development Department and the IRS. These payroll tax deposits must be made regularly, often monthly or weekly as taxes are withheld from payroll disbursements. If you become behind on making these deposits, you could face serious consequences and personal liability for the money owed. Knowing your rights, obligations and options is crucial to avoid the consequences of not paying these taxes on time.

The Trust Fund Recovery Penalty

Not making payroll tax deposits in accordance with the law is illegal, and collecting them is a high priority for the IRS. Payroll taxes are considered a trust fund tax, which means you are withholding taxes from your employees in trust for the government. Delaying payment of these taxes means you have “stolen” money that belongs to the IRS and you may be subject to the Trust Fund Recovery Penalty (TFRP).

In a recent worker classification ruling SS8 2010030006 the IRS held that a part-time bookkeeper/general office worker was an employee and not an independent contractor. Generally the existence of an independent contractor relationship is based upon a 20 factor common law test set forth in Rev. Rul. 87-41, 1987-1 CB 298. Some of the factors the IRS took into account were:

The worker performed services at the payor’s place of business as well as her own home The payer provided all office supplies including telephone, fax machine etc., although the worker provided her own computer, and accounting software.

The bookkeeper was paid hourly The worker did not receive any benefits

Many business taxpayers fail to pay over payroll taxes to the Internal Revenue Service (“IRS”). By doing so they expose themselves to personal liability pursuant to Internal Revenue Code Section 6672 known as the Trust Fund Recovery Penalty (TFRP). Generally, corporate officers, shareholders and others who have the responsibility for withholding and paying over payroll taxes can be held personally responsible for the trust fund portion of the payroll taxes if they willfully fail to pay these amounts to the IRS. Sometimes business owners who are undergoing tough financial times are tempted to take this risk. In my experience the thinking is that if a company doesn’t pay its vendors it will be out of business in short order. On the other hand the IRS tends to be slow about insisting on payment, and it can be months or even years in some situations before the IRS gets serious. Based upon this analysis the business owner decides to take a calculated risk, and hope that business picks up before the IRS shows up.

Jack Easterday found out the hard way that the stakes can be very high indeed. Mr. Easterday was convicted of willful failure to pay over employee payroll taxes in violation of Internal Revenue Code Section 7202. Mr. Easterday’s conviction was upheld by the Ninth Circuit Court of Appeals. United States v. Easterday. The extremely scary part of the decision by the Ninth Circuit was that the Court held that Easterday was guilty even though he may have been able to prove that the company didn’t have sufficient funds to pay the payroll taxes.

If you have payroll tax problems, or any other type of tax problem you can contact the tax lawyers at Brager Tax Law Group.

The California Employment Development Department (EDD) announced that it will be exchanging payroll tax information with the Internal Revenue Service (IRS) . The EDD is the state agency which includes in its duties making sure that employers withhold and payover state payroll taxes. The EDD programs include payroll tax audits of business owners to make sure that all workers who have been treated as independent contractors are truly independent contractors, and not employees. In determining whether workers are properly classified the EDD sometimes relies on the 20 factor test set forth by the IRS in Rev. Proc. 87-41. It also relies on a 9 factor test set forth in the California Supreme Court case set forth in Tieberg v. California Unemployment Insurance Appeals Board (1970), 2 Cal. 3d 943 P. 2d 975; 88 Cal. Rptr. 175. The factors listed are:

1) Whether or not the one employed is engaged in a distinct occupation or business;

(2) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal or by a specialist without supervision;

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