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“Do undocumented immigrants pay taxes?”The key phrases here are: tax under-reporting, underpayment and tax evasionIt might be realistically said that illegal immigration is functionally equivalent to criminal tax evasion.As every pig-farm worker and dish-washer in the US knows, the more allowances you claim on a Form W-4, the less withholding there will be from your paycheck. Which means avoiding the payment of appropriate taxes.And in fact, some employers counsel illegal alien workers to write in quite inappropriately large numbers of W-4 allowances so that almost no withholding takes place.You can usually get away with this for many years, particularly because the average illegal alien worker uses falsified identity documents and the liabilities and penalties for under-reporting and failure to pay income taxes on earned income will fall on the actual owner of the purloined identity.Remember that there are two guilty parties: employers who unlawfully hire aliens and then under-report their earnings, and then the unlawful tax evasion on the part of the aliens themselves.Many employers go one step further, and collect withholding and other taxes from illegal aliens and then fail to deliver those tax monies to the applicable government revenue agencies.Then you must remember that very large numbers of illegal aliens work “in the black” — which means off the books. Paid in cash, no deductions for taxes.So the answer is: on the whole, illegal aliens represent a significant under-payment of taxes, and broad levels of criminal tax evasion.For some interesting specifics of one of a very large number of tax evasion scams, read this indictment.USA v. Khan, Docket No. 1:16-cr-10238 (D. Mass. Aug 18, 2016), Court DocketOr perhaps just read this summary:“ The Khan cases involved a common tax scheme where U.S. employers illegally hired undocumented workers. Federal law requires employers, like Khan, to withhold from their employees’ pay their shares of FICA (employment) taxes and federal income taxes. Those employers are required to pay over to the IRS the withheld funds and the employer’s share of FICA taxes, along with any corresponding income taxes owed by the employer and associated business. Accordingly, Khan was required every year to submit to the IRS Forms 940, 941, W-2, and 1120. Also, all employers, including Khan, must abide by the federal immigration employment verification system for purposes of hiring non-U.S. citizens. Khan was accused of violating these tax and immigration laws through the following acts.Khan owned several fried chicken restaurants in Massachusetts. Khan lied about his ownership and control over the restaurants. He significantly understated information to his tax preparers about employees, gross receipts, cost of goods sold, officer compensations, salaries and wages, and taxable income from his restaurants. This resulted in falsely prepared Forms 940, 941, W-2, and 1120. He also failed to issue accurate Forms W-2. Additionally, Khan paid employees in cash “under the table” and employed immigrants without legal work authorization.”Source: CHICKEN OR EGG? (TAX EVASION OR IMMIGRATION VIOLATION?)

Startup R&D tax credits are about to change dramatically. Traditionally, these tax credits were calculated and saved up against a Corporation’s annual tax forms. For startups that aren’t yet profitable, that meant that they would only benefit from these tax credits once they became profitable in future years.The PATH (Protecting Americans from Tax Hikes) Act of 2015 has changed all of that. Regulators acknowledged that the old R&D tax credits weren’t appetizing to founders if it only promised a potential future benefit that may never be realized. And so the R&D tax credit has been revised to give more instant gratification: R&D tax credits generated in 2016 can be used to offset payroll taxes come mid-2017.In prior years I’ve sometimes told my clients that the cost of performing an R&D tax credit study would outweigh the benefit. Now that you can claim these credits almost immediately and against your payroll taxes, I highly recommend that every eligible startup engage in an R&D Tax Credit payroll offset.Why should I have my startup file for the R&D tax credit payroll offset?***IT SAVES YOU DIRECT $$$ NOW!!!***Up to $250,000 per year for up to 5 years!Am I eligible? Can any startup apply for the R&D tax credit payroll offset? What defines Research & Development?Unfortunately, not every company is eligible. You must be creating something new, and by new I mean pass the IRS’ 4 Part Test. Your R&D must be:Specific: no mindless tinkering allowed. The project must be defined.Eliminate Uncertainty: must be contributing real scientific advancement, not just proving existing knowledge.Experimental: either have a scientific method or trial and error process.Technical: the work must be grounded in the hard sciences like biology or engineering.Are there any R&D activities that don’t qualify?Research after commercial productionAdaptation of existing business componentsDuplication of existing business componentReverse EngineeringSurveys & studiesComputer software for internal useForeign researchResearch in the Social Sciences, Arts, Humanities, etc.Funded researchIs my startup eligible for the R&D tax credit payroll offset?The startup must have qualifying R&D expenses (see definition below).The startup must be new; only startups that have generated revenue for 5 years or less can claim the new tax credit. If you had receipts prior to 2012, then you’re ineligible.The startup must have less than $5 million in revenue in 2016 and each subsequent year that you claim the payroll offset.What qualifies as a R&D Expense? What goes into the calculation?Wages: but only for those people who engage in R&D activities.Subcontractors engaged in R&D: ‘nuff said.Supplies: only include direct supplies that were related to the R&D project and weren’t classified as an asset.Computer Leases/Rentals: we rarely see this…How do I claim the R&D tax credit payroll offset?First file the R&D tax credit on Form 6765 (Credit for Increasing Research Activities) which is a part of your 2016 annual corporate form 1120 (US Corporation Income Tax Return). Then claim your R&D tax credit on payroll tax form 941 (Employer’s Quarterly Federal Tax Return); you’ll need to work with your payroll processor to make this happen. We love working with Gusto, but just about every major payroll processor should be able to help.When should I file the R&D tax credit payroll offset?In early 2017, after you’ve closed out your 2016 books. Work with your CPA on an R&D tax credit study: once you’ve determined what your tax credit will be, add it to your 2016 annual corporate form 1120 and file the return. In the quarter following your 1120 filing, you can start applying those tax credits to your payroll taxes. For example, if you file your Form 1120 by March 15th, the first payroll tax offset you would receive is for Q2 2017.How much will my startup really save by implementing the startup R&D tax credit payroll offset?~10% of eligible R&D costs, up to $250,000 per year, for 5 years.Caveat: this article is intended as general guidance for startups and it doesn’t substitute the need to work with a professional. It’s also a high level overview and is in no way complete. Your company is unique; talk to your CPA.

Startup R&D tax credits changed dramatically starting tax year 2016. Traditionally, these tax credits were calculated and saved up against a Corporation’s annual tax forms. For startups that aren’t yet profitable, that meant that they would only benefit from these tax credits once they became profitable in future years.The PATH (Protecting Americans from Tax Hikes) Act of 2015 has changed all of that. Regulators acknowledged that the old R&D tax credits weren’t appetizing to founders if it only promised a potential future benefit that may never be realized. And so the R&D tax credit has been revised to give more instant gratification: R&D tax credits generated in 2016 can be used to offset payroll taxes come mid-2017.In prior years I’ve sometimes told my clients that the cost of performing an R&D tax credit study would outweigh the benefit. Now that you can claim these credits almost immediately and against your payroll taxes, I highly recommend that every eligible startup engage in an R&D Tax Credit payroll offset.Why should I have my startup file for the R&D tax credit payroll offset?***IT SAVES YOU DIRECT $$$ NOW!!!***Up to $250,000 per year for up to 5 years!Am I eligible? Can any startup apply for the R&D tax credit payroll offset? What defines Research & Development?Unfortunately, not every company is eligible. You must be creating something new, and by new I mean pass the IRS’ 4 Part Test. Your R&D must be:Specific: no mindless tinkering allowed. The project must be defined.Eliminate Uncertainty: must be contributing real scientific advancement, not just proving existing knowledge.Experimental: either have a scientific method or trial and error process.Technical: the work must be grounded in the hard sciences like biology or engineering.Are there any R&D activities that don’t qualify?Research after commercial productionAdaptation of existing business componentsDuplication of existing business componentReverse EngineeringSurveys & studiesComputer software for internal useForeign researchResearch in the Social Sciences, Arts, Humanities, etc.Funded researchIs my startup eligible for the R&D tax credit payroll offset?The startup must have qualifying R&D expenses (see definition below).The startup must be new; only startups that have generated revenue for 5 years or less can claim the new tax credit. If you had receipts prior to 2012, then you’re ineligible.The startup must have less than $5 million in revenue in 2016 and each subsequent year that you claim the payroll offset.What qualifies as a R&D Expense? What goes into the calculation?Wages: but only for those people who engage in R&D activities.Subcontractors engaged in R&D: ‘nuff said.Supplies: only include direct supplies that were related to the R&D project and weren’t classified as an asset.Computer Leases/Rentals: we rarely see this…How do I claim the R&D tax credit payroll offset?First file the R&D tax credit on Form 6765 (Credit for Increasing Research Activities) which is a part of your 2016 annual corporate form 1120 (US Corporation Income Tax Return). Then claim your R&D tax credit on payroll tax form 941 (Employer’s Quarterly Federal Tax Return); you’ll need to work with your payroll processor to make this happen. We love working with Gusto, but just about every major payroll processor should be able to help.When should I file the R&D tax credit payroll offset?In early 2017, after you’ve closed out your 2016 books. Work with your CPA on an R&D tax credit study: once you’ve determined what your tax credit will be, add it to your 2016 annual corporate form 1120 and file the return. In the quarter following your 1120 filing, you can start applying those tax credits to your payroll taxes. For example, if you file your Form 1120 by March 15th, the first payroll tax offset you would receive is for Q2 2017.How much will my startup really save by implementing the startup R&D tax credit payroll offset?~10% of eligible R&D costs, up to $250,000 per year, for 5 years.Caveat: this article is intended as general guidance for startups and it doesn’t substitute the need to work with a professional. It’s also a high level overview and is in no way complete. Your company is unique; talk to your CPA.