Employment laws are becoming more complicated making it harder to stay compliant. The IRS collects nearly $5 – $7 billion from businesses each year for failing to pay payroll taxes.

Because smaller businesses manage payroll using mostly manual processes and disconnected software, they are far more likely to run afoul of the IRS, which can result in miscalculations and incorrect filings as well as late deposits of withholding funds.

If you’re a business leader who wants to remain in the IRS’s good graces and avoid fines and penalties, here’s what you should know.

What Payroll Taxes Do You Have to Pay?

These include state and federal taxes:

• Federal unemployment tax: You have to pay this tax on the gross pay of all employees. Collect these taxes quarterly or annually with Form 940.
• Federal and state income taxes: You need to withhold these taxes from employee taxable wages and submit them to a federal and state authorities.
• FICA taxes: Also known more popularly as Social Security and Medicare taxes. These taxes, unlike income taxes, are withheld from employee pay and matched by employers. Depending on your payroll size, you are required to submit FICA taxes monthly or bi-weekly. FICA taxes can be reported quarterly using Form 941. State portions vary by state. Most states are at 0.6% employer only contributions.

What If You Have Unpaid Payroll Taxes?

No ifs, ands or buts: You will be punished if you have unpaid payroll taxes. More specifically, you’ll be penalized a specific percentage of your gross payroll deposit, based on how many days your deposit is considered late.

What Are the Penalties for Failing to Deposit my Payroll Taxes?

An owner or partner can be held personally liable for willful failure to withhold employee pay and payroll taxes from federal and state agencies. It’s known as the Trust Fund Recovery Penalty and it’s one of the biggest penalties the IRS dishes out.

Of course, these are also criminal punishments, so they carry a potential $10,000 fine and/or imprisonment of up to five years. Here’s what to do to stay on the right side of the law.

Strategies to Follow to Lower Risk

Be sure your budget includes any tax payments. You may be rolling your eyes at this advice, but it’s not unheard of for organizations to overlook incorporating taxes into their annual budgets, particularly very small employers or sole proprietors. This is a quick, easy fix that can save you a lot of headache.

Leverage an HR & payroll provider to automate the payroll process. If you’re looking to free up more time on focusing on other, more strategic initiatives, why not automate your payroll processes? The right partner will help you avoid payroll tax penalties related to unpaid taxes, reduce administrative burdens and make sure your employees are paid accurately and on time.

Keep abreast of IRS announcements and resources. The IRS is permanently printing news about tax returns, changes in tax law, tax tips and deadlines to file forms, so it’s essential that you, your accountant or your payroll provider keep your finger on the pulse.

How The Payroll Company Can Help Minimize Your Risk

For over 20 years, The Payroll Company has individualized Payroll. We deliver the most effective and convenient solution available.

Secure payroll tax compliance, workers’ comp, and federal and state laws and regulations with help from our specialized tax experts.

We reduce admin processes by giving access and allowing your employees to perform self-service.

We will help you keep track of employee pay accurately.

Your payroll service benefits from general ledger integration with easy access to HR resources like employee policies, job descriptions and templates.

According to Payroll tax penalties, Sec. 6656, when you are not able to deposit the taxes then it becomes a very catastrophic situation. A business generally faces a payroll penalty when it gets very difficult for it to afford especially for new businesses or the businesses with poor cash flow. Businesses can eliminate the payroll tax penalty by practicing a few things.

The initial thing to look for is asking the IRS to terminate the payroll tax penalty. This is significant if the underpayment of payroll tax deposit is a special case but not a rule. Taking an example, if a new business was unable to pay its first payroll deposit on time but it timely paid all the other payroll deposits then there is likelihood that the business gets rid of the payroll penalty. Taking another example of a business with a continuous history of paying the payroll deposits on a timely basis but unfortunately, it became late only for one deposit then for IRS to eliminate the payroll tax penalty, the employer has to show this as an unexpected event. And if the payroll text penalty is not eliminated then the employer has to find out some other strategy that works for him.

The employer can also take help from the “First Time Abatement” requesting the IRS. A business with no penalty for the initial 3 years can request for a “First Time Abatement”. Upon receiving an assessment letter for payroll tax penalties, you can request for “First Time Abatement” of the penalty if you are eligible and if you are not then you need to go for a “reasonable cause” argument. It is a good idea to try a reasonable cause argument first. You can also try reasonable cause much frequently when it is needed. The First Time Abatement is referred to as a get out of jail card that you can take help from once every three years.

If the employer skipped some of the payroll tax payments every quarter then he might be using the IRC §6656(e). IRC §6656(e) allows the taxpayer to assign the payroll deposits to payroll liabilities for a time period of a quarter. This is helpful in reducing the penalties to a remarkable level. This complicated calculation is automatically simplified by the IRS Interest & Penalty Calculator by the use of the IRC §6656(e). To perform this calculation, simply run the IRS Interest & Penalty Calculator and prepare a schedule of payroll deposit penalties. You have to respond to the IRS payroll tax notice within 90 days of the notice. In its response, you must include these lines “Pursuant to IRC §6656(e), the taxpayer by means of this, requests the payroll tax deposit to be applied to the payroll tax liabilities as specified by the attached schedule of the payroll deposit penalties”. Also, don’t forget to add a copy of the payroll deposit penalties schedule. This strategy has proved to be very helpful for some businesses.

The payroll tax penalty is calculated when you multiply the amount of the late payment by a payroll tax penalty percent. This percent depends on the number of days late as clearly visible from the following table.

DAYS LATE | PENALTY PERCENT

1-5                |     2%

6-15              |     5%

Above 15      |   10%

How the Payroll Tax Penalty is calculated by the IRS?

When the payments are not assigned in agreement with the payroll liabilities by the employer then the penalties are calculated by the IRS for the quarter where the payroll tax payments are applied earliest to the payroll tax liabilities. This is a realistic practice but it has one drawback that if the initial payment is made late then as a consequence, other payroll deposits that are paid on time also become late.

To take an example, let’s consider the following situation:

It is mandatory for the employer to quarterly pay the payroll taxes. This comes to 3 obligatory payroll tax deposits per quarter. The first monthly payroll tax deposit was low paid and the remaining two monthly deposits were timely paid. This mistake was identified by the time when the payroll tax return form 941, was filed.

A payroll tax penalty notice from the IRS is sent to the employer. In this practice, when the payments applied by the IRS to payroll tax liabilities cause all the 3 deposits to become late and is dependent on payroll tax penalty. After that, the IRS applied some of payment 2 to unpaid liability 1. As a result, liability 2 becomes underpaid. Afterwards, some of payment 3 was applied by IRS to the unpaid portion of liability 2. This clearly shows the decline in payroll penalties. Although the IRS considers this to be unjust however, this issue can be rectified by properly using IRC §6656(e) on time. When the IRC §6656(e) is used in the right way and only 1 deposit gets late but not all of the 3 then it becomes notable.

Why there is need to reduce the payroll penalty?

Now the IRS is able to accept the employer’s selection of how the payments are applied to payroll accountabilities. From the example stated above, if the payment that was made using Form 941 is applicable to 1st payroll liability then this means that only the first payroll tax deposit should have come up with a payroll tax penalty.

In Rev. Proc.99-10, the IRS demonstrates with the help of an example. According to this example, the IRS notice states a payroll tax penalty of $500. When the employer selects how the payments are to be applied then there is a decrease in the penalty to $200. To further determine the details, have a look at IRC §6656(e) and Rev. Proc. 99-10 and read them carefully.

This appears very simple and precise no that’s wrong! It is simple only when there is one low-paid payroll tax deposit in every quarter. In case of more than one underpaid payroll tax deposits, every quarter then is there any ideal order for applying the payroll deposits to payroll liabilities? In case of 7 payments every quarter then you can arrange these payments into 5,040 ways. In case of 8 payments, you can arrange these payments in 40,320 ways. Is it possible for an employer to come up with a minimum amount of payroll tax arrangement of payments?

If you are interested in helping out with this procedure then simply contact The Payroll Company by filling out the CONTACT US form on our website.