Properly classifying workers, withholding the correct taxes, and timely filing and paying employment taxes are fundamental responsibilities for any business owner. Failing to do so can lead to serious legal consequences, as evidenced by a recent IRS Criminal Investigation (CI) and Department of Justice (DOJ) case involving a New Jersey business owner.

A New Jersey man recently pleaded guilty to tax evasion after a long history of evading employment tax penalties. His case underscores the importance of adhering to employment tax laws and the risks associated with trying to avoid these obligations.

The Case: Evading Employment Taxes and Penalties

This business owner owned multiple masonry companies in New Jersey and was responsible for withholding and paying employment taxes on behalf of his employees. From 2008 to 2016, the IRS assessed approximately $650,000 in Trust Fund Recovery penalties because his businesses failed to pay federal employment taxes. These penalties are imposed on individuals responsible for collecting, accounting for, and paying employment taxes when those obligations are not met.

Instead of paying the penalties and correcting the issue, the business owner continued to evade his employment tax obligations. According to court records, from 2008 to 2019, he:

• Placed his companies under nominee owners to hide his control over the businesses.
• Avoided using bank accounts in his own name to prevent the IRS from levying funds.
• Continued to cause his businesses to withhold but not remit employment taxes, resulting in an additional loss of $1.2 million to the IRS.

In total, he caused a tax loss of $1.88 million. He now faces up to five years in prison, restitution, and monetary penalties. His sentencing will take place in March 2025, where a federal judge will determine the final outcome based on the U.S. Sentencing Guidelines.

Key Lessons for Business Owners

This case serves as a stark reminder of the importance of fulfilling employment tax obligations. As a business owner, it is crucial to understand the responsibilities that come with classifying workers and handling payroll taxes. Here are the key takeaways:

1. Correct Worker Classification

Misclassifying employees as independent contractors can lead to significant tax issues. Employers must:

• Withhold income, Social Security, and Medicare taxes for employees.
• Pay their share of Social Security and Medicare taxes and federal unemployment (FUTA) tax.
• Ensure compliance with federal and state labor laws.

Misclassifying workers as independent contractors to avoid payroll taxes is a violation of tax law, and the IRS can impose significant penalties on business owners who intentionally misclassify workers.

2. Withholding and Paying Employment Taxes

Employers are required to withhold and pay employment taxes on behalf of their employees. This includes:

• Income taxes: Withheld from employee wages based on their W-4.
• FICA taxes: Which cover Social Security and Medicare.
• FUTA taxes: Paid by employers for federal unemployment insurance.

Employers must deposit these taxes regularly, usually through the Electronic Federal Tax Payment System (EFTPS). Failure to do so, as in this case, can lead to substantial financial penalties and criminal prosecution.

3. Trust Fund Recovery Penalty (TFRP)

The IRS takes unpaid employment taxes seriously. When an employer withholds taxes from employee wages but fails to remit them to the IRS, those taxes are considered trust fund taxes. The IRS may impose a Trust Fund Recovery Penalty (TFRP) on any person responsible for collecting, accounting for, and paying these taxes if they fail to do so.

This penalty is equal to 100% of the unpaid trust fund taxes, making it one of the most severe penalties the IRS can assess. In this case, the business owner was subject to these penalties for multiple years, adding to the tax liabilities owed.

4. Penalties for Evasion

This business owner’s efforts to evade payment—by using nominee owners and avoiding personal bank accounts—only exacerbated his legal problems. The IRS is highly vigilant when it comes to employment tax evasion, and efforts to hide assets or ownership can lead to criminal charges, including tax evasion and fraud. He now faces up to five years in prison due to his attempt to avoid paying his tax liabilities.

5. Consequences of Non-Compliance

Failing to meet employment tax obligations can result in:

• Severe monetary penalties.
• Criminal prosecution for evasion or fraud.
• Loss of business assets through IRS levies or seizures.
• Restitution and long-term financial consequences.

The IRS considers unpaid employment taxes particularly egregious because these funds are withheld from employee paychecks and should be held in trust for the federal government.

Final Thoughts: Compliance is Key

This case highlights the importance of properly classifying workers, withholding employment taxes, and paying them on time. The IRS is aggressive in pursuing employers who fail to meet their obligations, and the consequences for non-compliance can be devastating.

Business owners who are unsure of their obligations or who find themselves in trouble with employment taxes should seek professional help immediately. Our firm specializes in helping businesses stay compliant with employment tax laws, manage payroll tax issues, and resolve disputes with the IRS.

If you’re facing challenges with employment taxes or need help ensuring your business is in compliance, contact us today for a consultation. Protect your business from costly penalties and legal action by addressing these issues proactively.