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.
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.