An employer is required to withhold federal income and payroll taxes from its employees’ wages and remit withholding taxes to the Internal Revenue Service. Withheld payroll taxes are called trust taxes because the employer holds the employees’ money (federal income taxes and the employee portion of Federal Insurance Contributions Act taxes) in trust until a federal tax deposit of that amount is made. Employers who do not comply with the employment tax laws may be subject to criminal and civil sanctions for willfully failing to pay employment taxes.
Employers who do not comply with the employment tax laws may be subject to criminal and civil sanctions for willfully failing to pay employment taxes.
Federal and state payroll taxes include:
Federal and state income taxes which must be withheld from employee pay and paid to the IRS (federal income taxes) and state (state income taxes) as required by law.
FICA taxes (Social Security and Medicare taxes) withheld from employee pay and matched by employers. FICA taxes must be paid either semi-weekly or monthly, depending on the size of your payroll, and reported quarterly on Form 941.
Federal unemployment taxes which are paid based on gross pay of all employees. These taxes are paid quarterly or annually and are reported in Form 940.
State unemployment taxes, collected, reported and paid according to state laws.
Other payroll tax obligations including annual wage and tax reporting for employees on Form W-2 and for contract workers on Form 1099.
Personal Liability for Payroll Taxes
Employers experiencing cash flow problems sometimes fail to pay the withheld taxes, choosing instead to use the cash attributable to those taxes to fund operations. If an employer’s business ultimately fails and cannot pay the IRS the withheld taxes, the IRS will seek to collect them from any “responsible person” of the employer (e.g., an officer, director, shareholder or other owner, or bookkeeper with signature authority over a bank account). This personal liability for the “responsible person” can be substantial.
What are the penalties?
Penalties are complicated; this list is for Form 941 taxes (withholding and FICA taxes) but may also apply to other similar forms.
Failure to deposit for Form 941 and similar forms: 2 percent 1- 5 days late, 5 percent 6 -15 days late, 10 percent more than 16 days late or within 10 days of first notice from the IRS, maximum 15 percent.
Trust Fund Recovery Penalty, for failure to pay payroll taxes when due. Imposed on responsible party. The IRS says, “If income, social security, or Medicare taxes that must be withheld or are not paid, you [as a responsible party] may be personally liable for the trust fund recovery penalty.” Remember, the Trust Fund Recovery Penalty is 100 percent of the unpaid tax (income, social security, and Medicare). In addition to penalties, interest accrues from the due date.
Failure to file penalty for Form 941, 5 percent of the unpaid tax due with the return, for each whole or part month a return is not filed when required.
Other types of payroll-related penalties
• Even if you can prove your failure to pay or report taxes wasn’t “willful,” and you avoid having to pay the TFRP, you can still face fines for late payments.
• You also may be penalized for unpaid payroll taxes if you misclassified workers as Independent Contractors instead of as employees.
• Failure to prepare W-2 forms for employees and provide them by the deadline (the end of January, for the previous year), may subject you to a $50 penalty for each statement that should have been sent or which was incorrectly prepared.
Several approaches to your payroll tax problem may include:
• Submitting an Offer in Compromise to reduce your payroll tax debt.
• Obtaining a short-term deferral of your payroll tax debt.
• Negotiating an Installment Payment Agreement so you can have additional time to pay.
• Reviewing your tax accounts to determine whether or not the IRS has correctly calculated your payroll taxes.
• Determining whether the time the IRS has for collecting your payroll tax debt has expired, or will expire soon.
• Negotiating releases of federal tax liens so that you obtain a loan to pay off your taxes.
• Having your payroll tax debt declared currently uncollectible so you can have a tax holiday from your old payroll tax debts.
• Obtaining releases of payroll tax levies.
• Filing claims for interest and penalty abatement.
Employees suffer because they may not qualify for social security, Medicare, or unemployment benefits when employers do not report or pay employment and unemployment taxes. Consequently, taxes withheld and paid by compliant employers are used to pay the refunds and social security benefits of employees whose employers did not pay the withheld taxes. AT