Why Trying to Evade Uncle Sam Is a Doubly Dumb Strategy

At year-end, business owners operating on a calendar year face the annual chore of wrapping up the books preparatory to sending their financial information to the accountant for tax preparation. This is also the time of year that many contractors look ahead to creating a budget for the upcoming year. It’s a perfect time to think about ways to save money.

One of the simplest ways to cut back on costs is to avoid spending money on fees and penalties.

Don’t mess with the government
Many contractors try to save money by classifying their workers or supervisors as subcontractors to avoid having to pay payroll taxes, worker’s compensation, and benefits. However, this can backfire in a multitude of ways.

When work slows and you have no more work for this “subcontractor,” he often files for unemployment. Then you are caught in a nasty audit from your state employment office. If you get audited by the state and it determines your subs are really employees, then YOU have to pay all the state taxes, including the withholding. You can only get that back if you can prove your subs paid taxes on their earnings—not an easy task. And finally, once the state is done with you, they turn you over to the IRS to start the process all over again!

If the “subcontractor” gets hurt on the job, you get caught in a nasty worker’s compensation audit and have to pay back-workers’ comp for 3 or more years for this ‘subcontractor.’ And finally, if you and your “subcontractor” get into a nasty argument (and all goodwill flies out the window), he will probably turn you in to the state, the IRS, the worker’s compensation bureau, and anyone else he can think of to make your life miserable.

Pay on time
In addition to the costs and inconvenience associated with being audited, it’s not difficult to accumulate other unnecessary fees and penalties by:

• carrying a balance on your credit card;
• paying bills late;
• paying payroll taxes late; and
• overdrawing your bank account

Adding insult to injury
So let’s say that you’ve just neglected to pay your payroll taxes on time, or received parking tickets. Although the associated fees can be staggering (especially for payroll-related errors), the sad fact is that these fees aren’t even tax-deductible. In addition to your having to pay them, they won’t even reduce your taxable bottom line!

Pay attention
Assign somebody in the company as a “compliance officer” to keep you out of trouble. Create a checklist that should be reviewed periodically to confirm that you are operating within the law and avoiding fines and penalties. Help your compliance officer get training to learn the laws of your state, including OSHA laws, RRP rules, insurance minimum coverage required and other regulations that can cost you money.

Can’t afford to have a lawyer on retainer? There are many pay-as-you-go legal services, such as Rocket Lawyer; these can be a less expensive alternative to hiring a lawyer.

It’s costly enough paying for necessary production and overhead costs. Avoid shelling out more bucks by understanding your obligations under the law and paying attention to the rules and regulations.