Nothing about dealing with the IRS is easy when you run a business, but figuring out your obligations for payroll taxes can be especially difficult. The situation can get even more complicated when we’re talking about unpaid payroll taxes.
The IRS takes payroll taxes very seriously. In fact, 70 percent of the annual revenue collected by the IRS comes directly from payroll taxes – and the IRS is especially aggressive when it goes after businesses that have failed to handle payroll taxes impeccably.
Do you have questions regarding what unpaid payroll taxes could mean for your business? Find out exactly how the IRS addresses unpaid payroll taxes.
What Payroll Taxes Do You Have to Pay?
Employers have a big responsibility when it comes to making sure the correct tax totals are withheld from employee paychecks every pay period. In addition, employers must then transmit the totals that are withheld to the appropriate tax agencies. Here’s a list of an employer’s duties in regards to payroll taxes:
- Paying your share of payroll taxes
- Depositing the dollar amounts withheld from employee paychecks
- Preparing reconciliation reports to document your tax dealings
- Recording all payroll expenses through acceptable financial reporting
- Filing returns for payroll taxes
Employers don’t get to decide when to submit payments. The IRS maintains a deposit schedule that requires businesses to make precise payments. In addition, the IRS maintains a very tight schedule for reporting. Keep in mind that you’re not simply paying one type of tax payment – an employer has several different tax obligations when handling payroll taxes. Here’s a rundown of your obligations as an employer:
- Federal income tax withholding
- Social Security tax withholding
- Medicare tax withholding
- Additional Medicare tax withholding
- State income tax withholding
- Various local, city, and county tax withholdings
You must stay up to date with the tax percentages that you are required to hold back for each type of withholding. It’s important to note that these percentages can change from year to year. What’s more, there could be additional stipulations to know about when calculating how much to withhold from each employee’s paycheck.
In short, handling payroll tax is a very heavy and serious responsibility for an employer!
Why Do Some Businesses Get in Trouble With Their Payroll Taxes?
There are many reasons a business can run into trouble with payroll taxes. Small businesses face a unique risk for delinquency due to the fact that there often isn’t a designated “payroll” department like you’d see with a large corporation. In fact, the owner of a small business is typically the person who handles payroll tax every single pay period. This is a difficult task that requires both time and knowledge of tax laws.
Did you know that an employer’s responsibility for payroll taxes continues even after paychecks are issued to employees? The biggest reason why businesses get in trouble with payroll tax is because they fail to take care of one of the many duties associated with payroll taxes. This can be anything from failing to pay the right amount to forgetting to report paid taxes correctly.
Here’s a look at the extensive reporting requirements that fall on your shoulders:
- Annual federal unemployment tax return (Form 940 or 940EZ)
- Employer quarterly payroll tax return (Form 941)
- Annual return of withheld federal income tax (Form 945)
- Wage and tax statements (Form W-2)
Many business owners simply forget to make tax deposits by their due dates because they are wearing so many hats. Of course, business owners sometimes knowingly put off handling payroll taxes because they are in a desperate situation. It is not uncommon for business owners to “borrow” from payroll tax funds during lean times just to keep the business going. Issues like natural disasters or a change in your depositing schedule can also lead to unpaid or unreported payroll taxes. Both purposeful and accidental errors can land a business in hot water with the IRS.
Personal Liability for Payroll Taxes
A business owner can certainly be personally liable for delinquent payroll taxes. The Trust Fund Recovery Penalty (TFRP) enables the IRS to go after individuals when businesses fail to pay payroll taxes. The consequences of the TFRP are particularly harsh because the IRS is empowered to seize assets and force a business to close. What’s more, the TFRP can be applied in addition to any criminal or civil penalties a person faces. Even bankruptcy can’t make it go away.
Anyone who functions as a corporate officer or “responsible party” is seen by the IRS as being liable for unpaid payroll taxes. Unfortunately, you could still be liable even if you’ve outsourced payroll duties to a third-party company. The IRS can assess penalties and interest on your account if that third-party company fails to make payments on your behalf.
What Are the Penalties for Not Paying Payroll Taxes?
There is no hiding the fact that your payroll payments are missing or late when it comes to the IRS. Once payroll taxes are overdue, you can expect high penalties pretty quickly. Here’s a look at the penalty schedule:
- 2 percent when a payment is between one and five days late
- 5 percent when a payment is between six and 15 days late
- 10 percent when a payment is more than 16 days late
- 15 percent for additional lateness
Keep in mind that these are just the percentages you’ll be responsible for on top of whatever you already owe. Your failure to handle payroll taxes correctly could result in a full-scale investigation that examines all aspects of your company’s tax dealings. This could result in asset seizure, the shuttering of your business, and jail time. A criminal investigation for fraud could change your life irrevocably.
Don’t let it go that far. Start exploring options for mending unpaid payroll taxes immediately.
What Are Penalty Exemptions?
You should know that penalties aren’t always automatic just because you’ve fallen short when it comes to your payroll tax obligations. However, navigating the landscape of exemptions for unpaid payroll taxes should be done very carefully. Is it possible to have payroll tax penalties waived? You may be able to have penalties waived if you can prove that your lapse is justified by reasonable cause. This means that you were unable to take care of your tax obligation as an employer due to circumstances that were beyond your control. This often includes things like fires or natural disasters. It will be up to you to present your case to the IRS in a way that proves you did everything possible to handle your payroll tax obligations.
You may also be able to receive a penalty exemption based on statutory or administrative waivers. This means that you can prove that a dramatic or sudden change regarding laws or regulations caused you to be unable to carry out your full obligation. This can include retroactive changes regarding how to calculate or deposit payroll taxes. In addition, confusion regarding compliance obligations could qualify you for a penalty exemption. It will be necessary to submit a letter to the IRS stating your predicament. It is possible that you’ll receive an administrative waiver automatically.
How Can You Avoid Penalties?
It is important to understand that the IRS views failure to submit payroll taxes as a form of theft. This is because you are holding on to money that never belonged to you. If the IRS is coming after you for unpaid or unreported payroll taxes, the best thing you can do is act quickly. The escalating. We’ll explore your options for getting interest and penalties waived. In addition, we can help you come up with a plan to make sure the right amount of payroll tax is paid to the IRS as soon as possible. The Tax Group Center has a team of lawyers, CPAs, and licensed tax professionals waiting to help you. Reach out today to get started with clearing up your payroll tax predicament.