Can I really go to jail?

Paul Boone of Hillsborough, NC, owner of Boone Audio, was recently sentenced to 15 months in prison for failing to pay employment taxes. "Paul Boone's prison sentence serves as a reminder to employers that willfully failing to comply with employment tax obligations is a crime," said Acting Deputy Assistant Attorney General Stuart Goldberg. "We are committed to investigating, prosecuting, and seeking incarceration of employers who use their employees' funds to line their own pockets."

Boone was also hit with three years' probation and must pay restitution to the IRS of over $385,000.

Failing to pay employment taxes is not the only HR related issue that can land an owner or even an HR manager in jail. Here are a couple of other scenarios where the penalties for willful violations can be pretty severe:

I-9 Violations - everyone from the supervisor to the plant or operations manager, the HR manager, the CFO, CEO and the owner faces possible prosecution when the organization knowingly and willfully hires individuals who are not authorized to work in the U.S. Penalties can range from 6 months to 10 years in prison, fines from $3,000 to $500,000, and asset forfeitures (yes, ICE can seize property in some cases, just like the DEA).

1099 Misclassifications - penalties for misclassifying workers as contractors when they should be employees start at 1.5% of wages, plus interest, plus 100% of the FICA tax the employer should have paid (no matter whether the contractor paid his/her taxes or not). That's if you properly filed the 1099s. If you messed that up, the fines are even more substantial. If the IRS determines you knew the rules but you intentionally violated them to avoid taxes, it can file felony charges with fines up to $100,000 and a year in prison.

The keys to avoiding these risks are to have basic HR practices in order:

Use the I-9 as intended and use e-verify. Follow those procedures and the likelihood that you'll be fooled by a fake social security card are low. Having these properly filed and ready for a regulator will demonstrate good faith. And don't knowingly hire undocumented workers - it's not worth it!

Don't use the 1099 incorrectly.  Many employers see using a 1099 for workers during their 90 day probation period or for summer temp workers as being a minor issue - like driving 7 miles over the speed limit. The IRS and the DOL don't see it that way. If you don't want to put folks on your payroll, the best approach is to engage them through a temp agency. Many agencies offer reduced pricing for workers that you found on your own, but don't want to hire directly. 

Form 1099 is designed for "true" contractors. Here's a list of what the IRS looks for. Don't knowingly pay workers via 1099 when they don't meet those criteria just to avoid workers comp or payroll taxes. You run the risk of sharing a cell with Mr. Boone!