Employers are obligated to pay payroll taxes on behalf of each of their employees. Many find it difficult to keep up with this task, and the various deductions. It is vital to understand your payroll tax requirements as failure to comply can result in penalties, interest and possibly prison time for non-payment. The following is a list of the most common employee withholdings:
- Federal income taxes (FICA)
- State income taxes
- Matching portion of Social Security taxes (SSI)
- Matching portion of Medicare taxes
- Federal unemployment tax (FUTA)
- State unemployment tax
- State workers’ compensation
- Railroad retirement taxes (industry specific)
Payroll Tax Problems Employers May Face
Employment taxes can differ each pay period depending on the type of tax and wages paid. It is the employers duty to deduct the proper amount of taxes from each employees paycheck, including their own contributions, and send all essential tax deductions to the correct government agency on time. There are also quarterly and annual taxes that must be paid. The laws in regards to payroll taxes and deductions are strict and it is extremely important to have an experienced person handle your company accounting and taxes.
Sometimes employers encounter problems when they:
- Miscalculate the amount of tax due from employees
- Miscalculate the matching contribution owed by the employer
- Misunderstand the tax code and their obligation to pay
- Delay remittance of mandatory taxes
- Misclassify an employee as an independent contractor
Trust Fund Recovery Penalty
Payroll taxes are labled “trust” taxes, meaning the employee’s deductions are held in trust by the employer until the taxes are due. The IRS and state agencies require all funds to be submitted correctly and on time, and can issue severe penalties when you fail to meet this commitment. The IRS imposes a Trust Fund Recovery Penalty (TFRP) when unable to collect unpaid trust fund taxes from employers even if the business is no longer in operation.
The IRS may assess a TFRP against anyone who:
- Is responsible for collecting and paying withheld income and employment taxes
- Willfully fails to collect taxes
- Willfully fails to pay taxes
Willfulness, as defined by the IRS, is when a “responsible” person:
- Must have been, or should have been, aware of the outstanding taxes; and
- Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
Using funds to pay other creditors when the business is unable to pay employment taxes indicates willfulness.
What is a “responsible person” in the view of the IRS?
“a person or group of people with the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.” This person may be:
- An officer or an employee of a corporation;
- A member or employee of a partnership;
- A corporate director or shareholder;
- A member of a board of trustees of a nonprofit organization;
- Another person with authority and control over funds to direct their disbursement; or
- Another corporation or third-party payer.
Employees who pay bills or who handle accounts payables for a company are not the “responsible person” under the auspices of the IRS if they pay bills through instruction from the owner, manager or supervisor as opposed to deciding on the bills that are to be paid.
For companies overwhelmed in meeting their monthly or weekly employment taxes it is critical and wise to address the problem directly and immediately before getting IRS mail notices or worse yet, before the IRS shows up at the business.