Payroll taxes are one of your most important liabilities when you have employees, including collecting and reporting as well as remitting these taxes. And if you simply forget — or outright neglect — your responsibility, your small business could be penalized for not paying payroll taxes.
However, whether you miss your deposit deadline for one of several reasons, the fact you are not paying payroll taxes is one of the big deals to the IRS and other tax agencies.
Missing your payroll tax due date is only one of the payroll mistakes you’d prefer to prevent.
Get our free guide detailing nine others, the way to avoid them and what to do if you’ve already made the error!
Summary of your payroll tax obligations
You need to take tax from your employees’ payable wages, and pay tax. Check out this list of employment taxes you might have to file:
- Federal, state, and local income tax
- Social Security and Medicare taxes (sometimes referred to as FICA tax)
- Federal and state unemployment tax
Instead, do this: Withhold federal, state and local income taxes, Social Security and Medicare taxes and certain taxes that may apply at the state level from employee wages. You also have to pay into Social Security and Medicare, unemployment and some state-specific taxes.
Withhold and contribute taxes for deposits. Pay payroll taxes based on your depositing schedule.
Federal income, Social Security and Medicare taxes can be deposited on a less frequent schedule — either monthly or semiweekly (or annually in some cases). Your schedule for depositing is based on a 4 quarter IRS lookback periods.
Pay federal unemployment tax four times a year. Your state will tell you when state unemployment tax and other state-specific taxes are due.
And, don’t forget payroll taxes need to be reported to the IRS and other tax agencies, as well.
Reasons for employers not paying payroll taxes
Imagine this: You withhold payroll taxes from employee wages. You separate the money from the rest of your business’s funds. However, you’re a busy business owner with numerous things to do. You totally forget your tax deposit due date, and thus do not pay payroll taxes.
Or, perhaps this sounds familiar: You put aside money for payroll taxes. But since your deposit isn’t due yet, you borrow your payroll tax funds in times of negative cash flow. When the payroll tax deposit due date comes, you can’t afford to pay.
Business owners have a plethora of other excuses for not making payroll tax payments. An example is a natural disaster that prevents you from timely tax payment. Or maybe your tax due-dates will shift.
Penalty for non-payment of payroll tax
Payroll taxes account for about 70% of the revenue the IRS gathers each year. Arising mostly from underreported and unpaid employment taxes, it represents about $72 billion of the U.S. tax gap. That’s why there are penalties if your business doesn’t turn in payroll taxes.
When you don’t pay payroll taxes for your business, you get a bill from the IRS and probably a penalty as well. Employers that fail to comply with employment tax laws face civil and criminal penalties, according to the IRS.
So, what happens if you fail to pay payroll taxes on time? The charge the IRS tacks on for you depend on:
- How much you owe
- How late the late payment is
According to the IRS, here’s the penalty for failing to pay payroll taxes based on how many days late you are:
Days Late >| Penalty
- 1 – 5 days 2%
- 6 – 15 days 5%
- 16+ days 10%
- 10+ days following initial IRS bill 15%
Let’s say you owe $2,500 in payroll taxes to the IRS. You are 16 days late. If such a thing happened, the IRS would penalize you and would make you liable to pay $250 more, your total bill would become $2,750. Bear in mind that this doesn’t involve any state penalties you may have to pay.
When you miss a payroll tax deposit deadline, not only do you have to deal with penalties. You also face interest rates. This adds up, as the IRS notes, to a 3% – 6% interest on what you owe.
If you do not set up and abide by a tax payment plan, the IRS may impose a tax lien and a tax levy against your property for your tax debt.
If the IRS believes you’re intentionally trying to avoid taxation, you could face a serious penalty, incarceration or both.
Just remember that there are also extra penalties for filing your reports late as well.
Penalty exemptions
The IRS sometimes waives a penalty … if you have a good enough reason. If you receive an IRS notice, you will need to explain why you think you had a reasonable cause for not paying.
Such as if you file an employment tax return in good time but miss the deposit due date with a new deposit schedule, the IRS may relieve you of penalties.
Guidelines for avoiding the penalty for not paying employers payroll taxes
If you’re like most business owners, you don’t want to mess with the penalty for failing to deal with payroll taxes.
some tips to help you keep up with your payroll tax obligations.
Withhold, contribute, and set aside taxes
You need to deduct taxes from the wages of every employee each time you process payroll. However, you, too, have to be chipping in every time, as well.
What if you wait until your tax deposit deadline to set aside your employer tax liability? Would you have enough cash to pay up in one go?
Have a system for reminding you that you need to take out and contribute payroll taxes when you run payroll. If you do payroll manually, you may have payroll software where you can set reminders.
Please don’t borrow from your payroll tax fund
If cash is tight for your business, it might be tempting to set off and raid your payroll tax screw. But you can’t borrow from your fund. Otherwise, you might not be able to replace the borrowed funds.
Having a separate payroll account for your collected and contributed taxes This way, you will know that you aren’t using your payroll taxes to cover other business expenses.
This also helps you make a reserve of cash for your business. Your payroll tax funds cannot be accessed unless used for payroll, but if you are short on cash you can use your emergency funds.
Look into full-service payroll software
Missing payroll taxes by deadline is something that can happen to any business owner — you have a million different things on your plate that you need to manage. Don’t risk it, try full-service payroll instead.
A full-service payroll calculates and withholds payroll taxes. Finally, the provider pays the taxes to the appropriate tax agencies on your behalf.
Looking to escape penalties for not paying payroll taxes? You want a dependable system that does the heavy lifting of your responsibilities. The Payroll Company manages the collection of payroll taxes, files the payroll tax returns and even remits your payroll tax liability, alleviating you of doing so.
