Messing with payroll taxes is like prodding a lion through the bars of its cage. You’ll eventually get bitten.
The IRS takes unpaid payroll taxes very seriously. There are severe penalties for businesses that fail to pay. Individuals can even face criminal charges. Don’t poke the payroll tax lion.
Payroll Tax Compliance is Mandatory
Withholding taxes from employee checks and paying them over to the government is required by law. Employees rely on their employer to handle these taxes properly. The IRS also expects to receive payroll taxes that have been withheld.
If payroll taxes are delinquent for a year or more, the IRS may pursue criminal tax evasion charges.
The Trust Fund Recovery Penalty
The IRS can hold “responsible persons” personally liable for unpaid payroll taxes. Their role makes them responsible for making timely deposits.
This “Trust Fund Recovery Penalty” equals 100% of the late payroll taxes plus interest and penalties. A $10,000 tax bill can quickly become a $20,000 personal liability.
Payroll Tax Evasion is a Crime
More than a civil offense, deliberately not paying payroll taxes can be prosecuted as tax evasion. Conviction can bring:
Up to 5 years in prison
Fines up to $250,000
Payment of all tax, penalties and interest
Lessons About Payroll Tax Compliance
Key takeaways on payroll tax compliance:
Payroll tax deposits must be made on time
Late payments bring stiff penalties
Unpaid taxes can lead to criminal charges
Individuals as well as businesses are at risk
Setting Aside Taxes Withheld
Payroll taxes withheld from employee checks must be kept in a separate trust account until paid to the IRS. These include:
Federal income tax
Social Security tax
Medicare tax
Commingling these “trust fund” taxes with general funds is prohibited.
Payroll Tax Deposit Schedules
Most businesses must make payroll tax deposits monthly or semi-weekly based on their level of tax liability. Deposit schedules are set by the IRS and must be followed meticulously. Even a 1-day delay can generate penalties.
Consequences for Late Deposits
Late payroll tax deposits lead to automatic penalties:
I’m guessing you already know this, but paying employees means payroll taxes. As their employer, you are required by law to withhold those taxes from paychecks. Your employees are counting on you to forward that money to the IRS.
And let’s be real – the IRS is totally expecting you to pay up on time. They do not play around when it comes to payroll taxes.
If you let payroll tax payments slide for a year or more, you’ve poked the lion. The IRS will likely hit you with criminal charges for tax evasion. In their view, you’ve basically stolen money held in trust for them.
So do yourself a favor and pay on time. Don’t poke this lion.
IRS Deadlines
The IRS has strict, non-negotiable due dates for payroll tax deposits. I know, it’s a total drag. But you don’t want to mess with them on this.
If you owe $1,000 or less in payroll taxes, you mail Form 941 quarterly by:
April 30
July 31
October 31
January 31
Paying $50,000 or less in total payroll taxes last year? Then you gotta file Form 941 monthly to report what you owe.
More than $50k last year? Form 941 is due twice every month, within 4 days after running payroll.
You also have to pay electronically through the IRS system by those dates.
No excuses, no exceptions. I don’t make the rules, the IRS does.
Delinquency Notices
Say you don’t pay on time. Those scary IRS letters will show up fast.
You filed Form 941 but didn’t pay what you owed? The IRS sends a bill for the taxes, plus penalties and interest. Not cool.
Didn’t even file Form 941? Then the IRS sends a bill with their best guess for what you owe. You really don’t want that.
Get two bills and still don’t pay? The IRS collections crew revs up their enforcement engine. This is bad news.
Legally, they can grab business assets, bank balances, inventory, and incoming payments to your customers.
Payroll Tax Due Dates
Let me break down when payroll taxes are due:
Owe less than $1k? Send that Form 941 every quarter:
January 31
April 30
July 31
October 31
Paid $50k or less in total payroll taxes last year? File monthly.
More than $50k last year? You file twice every month, within 4 days of running payroll.
No flexibility on the dates. Mark them on your calendar in permanent ink!
Filing Form 941
You report what you owe on Form 941:
$1k or less quarterly? File by the dates above.
$50k or less last year? Monthly filings for you.
Over $50k last year? Twice monthly it is.
Make sure to file even if you can’t pay. Don’t add late filing fees to your troubles!
Trust Fund Recovery Penalty
If you come up short on trust fund taxes, the IRS can hit you with a 100% penalty:
Employee income tax withheld
Employee Social Security and Medicare tax
This makes your responsible executives personally liable. Not the business, but you personally. Ouch!
Criminal Charges
If the IRS thinks you deliberately evaded payroll taxes, you may face criminal charges:
Felony tax evasion – 5 years in prison, $250k fine
Misdemeanor failure to pay – 1 year in prison, $100k fine
Do yourself a favor and avoid this nightmare scenario! Just pay on time.
Final Thoughts
You must pay payroll taxes on the IRS schedule, no exceptions. Late payment means huge penalties for your business and personally for you.
Do yourself a favor and pay on time! Don’t poke this lion.
Keeping up with the numerous commitments for federal, state, and local taxes is one of the many challenges that small-business owners must deal with. While most company owners hire a CPA or a tax specialist to deal with tax-related matters, it is crucial for those who are ultimately responsible for all tax responsibilities (the business owner) to fully comprehend the tax system. Because at the end of the day, it is the owner who will be held civilly (and potentially criminally) liable if the business fails to comply with tax obligations or if there is any wrongdoing. Therefore, it behooves you as a small business owner to know as much as possible about your tax obligations, even if you use the services of other tax professionals.
This article will concentrate on the business owner’s responsibilities in terms of payroll taxes and tax-related obligations that you must never ignore as a small business owner.
The Financial Test
This assessment examines an employer’s level of control over the financial aspects of the business. In many industries, a worker’s identity as an independent contractor is bolstered by having extensive control over work materials.
The availability of services is one way to tell the difference between an independent contractor and an employee. For example, an employee cannot advertise services unless they are working outside the firm, whereas as an independent contractor because they are not connected to one company.
The Relationship Test
This test examines how the employer and employee view their relationship. For example, the worker is an independent contractor if the relationship between the employer and the employee is expected to remain until the end of a project or for a set period of time. The worker, on the other hand, is a taxable employee if the relationship has no or few restrictions.
Taxable Wages Defined
Salary, bonuses, and gifts are all examples of taxable wages for services rendered. Some forms of payment, such as travel or food reimbursements for business, are not considered taxable wages. Employees must validate expenditures through receipts or expense reports in order for them to be nontaxable. They must also be needed, reasonable, and relevant to the business.
How to Calculate Withholding
After you’ve determined which employees are taxable and which wages are taxable, you’ll need to figure out how much you need to deduct for federal, state, and local taxes, as well as FUTA and FICA.
Federal Taxes
For the applicable period, federal income taxes must be withheld from every paycheck. Employers can utilize the IRS’s salary bracket tables or percentage tables to figure out how much to withhold.
The salary bracket tables are divided into five payroll periods (daily, weekly, bi-weekly, semi-monthly, and monthly). Owners choose the appropriate pay period and salary bracket for their employees, then move across the table to the column that displays the amount of claimed exemptions to determine withholding amounts.
The percentage tables are broken down by marital status and are accessible for eight different payroll periods (daily, weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annually, and annually). Employers begin by deducting the value of claimed exemptions from salaries. Then they check for the withholding amount depending on the wage bracket in the table that corresponds to the employee’s marital status.
It is your obligation as a business owner to examine the two sets of tables and pick which one is the best fit for your company. In terms of payroll intervals, percentage tables are more inclusive. Therefore if you have a situation where various employees are paid at different payroll periods, the percentage table should be your first pick. If your workers are paid quarterly, for instance, the percentage tables are better than the wage bracket tables. Request Publications 15 and 15-A.2 from the IRS or go to http://www.irs.gov/ to obtain these tables.
In Closing
Payroll taxes can be complicated to calculate, and it’s critical to deliver payments on time to avoid penalties and late fees. Payments for federal taxes can be done online through the Electronic Federal Tax Payment System (EFTPS) or at banks that are authorized to take federal payments. If you choose the latter approach, each transaction should be documented by Form 8109, which you may get from the IRS by calling 1-800-829-4933 or visiting their website.
Income and FICA taxes are normally deposited semi-weekly or monthly, and FUTA taxes are usually paid quarterly. At the conclusion of each year, the IRS normally sends a notification to business owners outlining which method to employ for the following year.
The day on which a deposit is made determines its timeliness. A mailed deposit received after the due date will, however, be deemed timely if you can prove it was mailed at least two days prior to the due date. Visit http://www.irs.gov/ or call the IRS live helpline for businesses at 1-800-829-4933 to learn more about small-business payroll responsibilities.
Skipping payment of your payroll taxes is like poking the lion at the zoo through the bars. Eventually the lion, or in this case the IRS, is going to bite the stick or you. Correct withholding of payroll taxes from employee paychecks is a legal mandate for all employers in the United States. Employees logically count employers to hold the money taken out of their check for payroll taxes and then send it on time to the Internal Revenue Service. The IRS also counts on receiving those funds and it has severe penalties in place for companies that don’t comply with law and send the funds that have been set aside. The bottom line for the IRS when it comes to payroll taxes is if the funds held aside for payroll taxes are delinquent for 1 year or more, they will most likely see it as tax evasion and come after you with criminal charges.
Trust Fund Recovery
Civil Penalties
Responsible parties identified by the IRS can be personally charged
with the Trust Fund Recovery Penalty for unpaid payroll taxes. Responsible
parties are charged with the mandate to payroll tax deposits on time. This is
accomplished by collecting the taxes due, holding them in a trust account then
paying the directly to the IRS. The Trust Fund Recovery Penalty is severe. It
is equal to 100% of the payroll taxes due, plus and any penalties and interest.
Let’s say there’s a total of $8,000 due
including penalties and interest. If IRS charges the Trust Fund Recovery Penalty
to a business, any and all responsible parties will be personally responsible
to pay a total amount of $16,000.
Past Due Penalties Assessed
as a Crime
Payroll taxes that go unpaid can be assessed by the IRS as tax
evasion. If this turns out to be the case, a responsible person may have to pay
up to a maximum fine of $500,000, go to prison for 5 years and be required to
pay the taxes, interest and penalties still due, including the Trust Fund
Recovery Penalty.
The Lessons for Employers to be Learned About Delinquent Payroll Taxes
Payroll taxes must be paid on time. Responsible parties with
the duty to pay payroll taxes face severe penalties and potentially even
criminal consequences for unpaid payroll taxes.
Skipping payment of your payroll taxes is like poking the lion at the zoo through the bars. Eventually the lion, or in this case the IRS, is going to bite the stick or you. Correct withholding of payroll taxes from employee paychecks is a legal mandate for all employers in the United States. Employees logically count employers to hold the money taken out of their check for payroll taxes and then send it on time to the Internal Revenue Service. The IRS also counts on receiving those funds and it has severe penalties in place for companies that don’t comply with law and send the funds that have been set aside. The bottom line for the IRS when it comes to payroll taxes is if the funds held aside for payroll taxes are delinquent for 1 year or more, they will most likely see it as tax evasion and come after you with criminal charges.
Internal Revenue
Service Deadlines for Payroll Tax Deposits
The breakdown for filing IRS Form 941 is as follows: Employers
owing $1,000 or less are required to mail IRS Form 941, Employer’s Federal Tax
Return each quarter. The envelope containing the return requires a post mark of
Apr. 30, July 31, Oct. 31 and Jan. 31, depending on the quarter. Employers who
paid payroll taxes of $50,000 or less for the year before are required to file
Form 941 each month. Employers who paid in excess of $50,000 or more for the
year before are required to file form 941 for taxes owed twice a month. It is
mandated taxes owed have to be via the IRS’ Electronic Federal Tax Payment
System no later than 4 days after the payroll date.
Internal Revenue
Service Delinquent Payment Notices
When payroll taxes are late, if you filed form 941, the first thing to happen is the IRS will send you a bill for the taxes due. The bill will indicate the taxes due plus penalties and interest. The IRS will send you an invoice for payroll taxes due if you did not file the quarterly return that was due. The IRS will begin collection activity if no response or payment is made regarding its 2nd late payment invoice for payroll taxes due. The IRS has the legal authority to seize business assets, inventory, accounts receivables and even business bank accounts to collect past due payroll taxes.
The Lesson for
Employers to be Learned About Delinquent Payroll Taxes
Payroll taxes must be paid on time. Responsible parties with
the duty to pay payroll taxes face severe penalties and potentially even
criminal consequences for unpaid payroll taxes.
