Published on: January 18, 2018 Last modified: October 21, 2020

When a Startup’s Shoddy Accounting Causes W-2 Problems

Table of Contents
    Add a header to begin generating the table of contents

    It is the season to collect tax documents. Payroll tax problems that may have been too small to catch on a pay period basis may show up as you review your W-2.

    You place a lot of trust in an employer to withhold and pay over taxes to federal and state agencies. For many startups, the focus might be on developing an idea – for example, synchronization and file backup services that rival competitors – instead of payroll practices. Transition is ownership or venture capital acquisitions can exacerbate problems. What happens if your tech startup has never invested in proper accounting protocols and screws up your W-2?

    You are on the Hook

    Whether you plug the numbers from a W-2 into tax software yourself or work with a tax preparer, accountant or CPA, a significant tax bill might come as a surprise. You will owe the IRS, even if your employer made the mistake.

    Mistakes can occur with a data entry error on your withholdings, maybe a 2 was erroneously entered as a 5 when you started a new job. If you do not catch the mistake during the year, it can lead to significant underpayment (i.e. a large tax bill). Request an immediate correction. You may also want to consider a payment plan with the IRS if you cannot make pay the unexpected tax bill prior to April 17, 2018.

    Classification of compensation can also cause problems. A bonus paid in cash or a new vehicle incentive probably falls into the income bucket. If completed outside of payroll, you may owe additional taxes.

    Fraudulent Circumstances

    In some cases, an employer withholds taxes from your pay, but never forwards then to the IRS. Cash flow issues may threaten and ownership may see this as a method to stay afloat and later repay these payroll obligations. If a startup flounders these obligations may never be paid. The IRS might levy significant Trust Fund Recovery Penalties against your employer, but that might not help you personally.

    This may leave you in a tough position with the IRS claiming you owe taxes that you have already paid. You need sound legal advice based on the facts of your situation.

    Your employer pays half of your Medicare (1.45 percent) and Social Security (6.2 percent). The employer’s share of these taxes is paid directly to the IRS. This is your employer’s responsibility and not yours.

    Do not delay, if you spot a mistake on your 2017 W-2. Talk with a tax attorney about your specific concerns. There may be various options to address back taxes and fix the problem moving forward.

    Share The Knowledge! 😊

    Share on linkedin
    LinkedIn
    Share on twitter
    Twitter
    Share on facebook
    Facebook
    Share on reddit
    Reddit
    Share on whatsapp
    WhatsApp
    Share on email
    Email
    Share on print
    Print

    Get More Knowledge

    Ready to secure your financial future? Subscribe Today For Tax Knowledge Tomorrow

    JOIN 2,000+ OTHERS. YES, IT’S COMPLETELY FREE. ZERO SPAM, UNSUBSCRIBE AT ANY TIME.

    How Can we help?

    Don’t worry, our consultations are 100% Confidential & 100% Free