As an employer, you are required to pay a handful of different payroll taxes for everyone you employ. These expenses can add up fast. If you are struggling with payroll tax problems, you’re not alone. There are a variety of items employers may withhold from an employee’s paycheck. These are the most common taxes employers withhold for their employees:
- 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)
It’s important for you to have a basic understanding of your tax obligations or you risk facing payroll tax problems and incurring heavy penalties, interest, or even jail time for non-payment.
Payroll Tax Problems Employers May Face
Frequently referred to as employment taxes, payroll taxes vary each pay period depending on the type of tax and wages paid. Employers have a responsibility to ensure each employee has the proper amount of taxes deducted from each paycheck. Combined with their own contributions, employers must then send all mandatory tax deductions to the appropriate government agency in a timely manner. Additionally, there are quarterly and annual taxes that employers must pay.
Unfortunately, employers can sometimes run into payroll tax 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
The rules and regulations regarding the payroll tax and its deductions are very strict. Even a small, unintentional miscalculation can cause problems. This is why it is important to have someone knowledgeable in accounting and/or taxes handle your company payroll.
Trust Fund Recovery Penalty
Historically, payroll taxes have been designated as “trust” taxes. That is, the monies deducted from an employee’s paycheck are held in trust until you pay the taxes.
Naturally, the IRS and state agencies want all monies due them in an accurate and timely manner. Since they trust you to hold the money in a trust fund, when you don’t meet your obligation, the penalties can be tough.
The IRS assesses a Trust Fund Recovery Penalty (TFRP) when they are unable to collect unpaid trust fund taxes from an employer, regardless of whether the business is in operation or not.
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 available funds to pay other creditors when the business is unable to pay employment taxes is an indication of willfulness.
What is a “responsible person” in the view of the IRS?
A responsible person is “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.
An employee is not “a responsible person” if the employee’s function is to pay the bills as directed by a supervisor, rather than to determine which creditors are paid.
If your small business is struggling to meet its employment tax obligations, don’t wait until the IRS is knocking at your door. Take action to correct the problem now.
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Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.