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Employment Tax Enforcement Program

Employment Tax Requirements

Employers are required by law to withhold employment taxes from their employees. Employment taxes include:

• Federal Income tax withholding
• Social Security and Medicare Taxes

The federal income tax is a "pay as you go tax." You must pay the tax as you earn or receive income during the year. For most employees this takes the form of income taxes withheld from their pay. Self-employed persons are also required to make estimated tax payments during the year. The pay as you go system was designed to ensure that taxpayers meet their tax obligations timely.

Social Security and Medicare taxes pay for benefits workers and their families receive under the Federal Insurance Contributions Act (FICA). Social security taxes pay for benefits under the old age, survivors, and disability insurance part of FICA. Medicare taxes pay for hospital benefits. Each employee contributes part of these taxes and the employer pays a matching amount. Self-employed taxpayers must also pay social security and Medicare taxes in the form of self-employment taxes. The programs funded by employment taxes provide essential benefits to many citizens. The importance of the programs will continue to grow as more citizens reach retirement age. The Federal Unemployment Tax Act (FUTA) tax, together with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs.

Employer and Employee Responsibilities
Both employer and employee hold the responsibility for collecting and remitting withholding taxes to the Internal Revenue Service (IRS). For the most part, the employer withholds these taxes on behalf of their employees, but in cases where an employer does not do this, or where an employee is self-employed, it is the responsibility of the employee to collect and pay withholding taxes.

Employer's Responsibility
Employers must report income and employment taxes withheld from their employees on an Employer's Quarterly Federal Tax Return (Form 941) and deposit these taxes in full to an authorized bank or financial institution pursuant to Federal Tax Deposit Requirements. Employers are also responsible for filing a FUTA return annually, and depositing those taxes.

Employers who do not comply with the employment tax laws may be subject to criminal and civil sanctions for willfully failing to pay employment taxes.

Employees’ Responsibility
Employees who do not have taxes withheld nor remit them personally, are still liable for these taxes and may not qualify for Social Security, Medicare, or unemployment benefits.

Employees who are concerned that their employer is improperly withholding or failing to withhold federal income and employment taxes should report their employer by contacting the IRS at 1-800-829-1040. In cases where the employer withheld employment taxes but failed to deposit them, or failed to issue W-2s, the employee should contact the employer to request the W-2. If the employee is unable to secure a W-2 from the employer, the employee should complete and attach Form 4852, Substitute for W-2, to their tax return using the best information available to calculate the wages and the withholding. This information can often be secured from pay stubs.

In addition, if the employer refuses to withhold employment taxes from these wages and the IRS is unable to collect the employment taxes from the employer, the employee still has the responsibility to pay income tax and is ultimately responsible for his/her share of the FICA tax.

Tax Compliance
Voluntary compliance remains the cornerstone of our tax system. Voluntary compliance means taxpayers are responsible for filing required tax returns and paying the correct amount of tax. Noncompliance with tax laws threatens the stability of our tax system.

Sometimes noncompliance results from lack of knowledge on the part of the taxpayer. In these instances the Internal Revenue Service (IRS) will work with the taxpayer to bring them into compliance. It is in an employer’s best interests to file employment tax returns, pay, and deposit taxes timely. Failure to do so can result in the imposition of a variety of civil sanctions.

When taxpayers attempt to evade the employment taxes they may be subject to criminal sanctions. These are the most severe sanctions that can be imposed and often result in the taxpayer being sentenced to a term of imprisonment, fined and ordered to make restitution (in addition to other civil sanctions.)

Unscrupulous individuals and promoters advocating willful noncompliance with the tax laws have used a variety of false or misleading arguments for not paying taxes (employment taxes.) The courts have repeatedly rejected these arguments as frivolous and routinely impose financial penalties when such meritless arguments are raised.

Evading employment taxes can have serious consequences for employers and the employees. Employers may be subject to criminal and civil sanctions for willfully failing to pay employment taxes. Employees suffer because they may not qualify for social security, Medicare, or unemployment benefits when employers do not report or pay employment and unemployment taxes. Consequently, taxes withheld and paid by compliant employers are used to pay the refunds and social security benefits of employees whose employers did not pay the withheld taxes.

Employment tax evasion schemes can take a variety of forms. Some of the more prevalent methods of evasion include pyramiding, employee leasing, paying employees in cash, filing false payroll tax returns or failing to file payroll tax returns.

"Pyramiding" of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme.

Employee leasing is another legal business practice, which is sometimes subject to abuse. Employee leasing is the practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay over to the IRS any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the company dissolves, leaving millions in employment taxes unpaid.

Paying employees in whole or partially in cash is a common method of evading income and employment taxes resulting in lost tax revenue to the government and the loss or reduction of future social security or Medicare benefits for the employee.

Preparing false payroll tax returns understating the amount of wages on which taxes are owed, or failing to file employment tax returns are methods commonly used to evade employment taxes.

Statistical Data - Employment Tax Evasion
Enforcement statistics on investigations initiated, prosecutions recommended, indictments, convictions and months to serve in prison.

FY 2004 Examples of Employment Tax Fraud Investigations
Summaries of investigations have been written from public record documents filed in the district courts where the case was prosecuted.

• FY 2003 Archive Examples of Employment Tax Fraud Investigations

• FY 2002 Archive Examples of Employment Tax Fraud Investigations

IRS Criminal Investigation has a presence on www.irs.gov and this same information is available on the Employment Tax Enforcement page.