As an employer, you must pay payroll tax 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.
What payroll taxes are required?
These are the most common taxes employers withhold for their employees:
- Federal income tax (FICA)
- State income tax
- Matching portion of Social Security and medicare tax (SSI)
- Federal unemployment tax (FUTA)
- State unemployment tax
- State workers’ compensation
- Railroad retirement tax (industry-specific)
It would help if you had 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.
Paying 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 promptly send all mandatory tax deductions to the appropriate government agency. 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.
Caution to the business owner
The rules and regulations regarding the payroll tax and its deductions are stringent. 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 tax has been designated as a “trust” tax. That is, the monies deducted from an employee’s paycheck are held in trust until you pay the tax.
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, the penalties can be tough when you don’t meet your obligation.
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 in charge of the collection and payment of income and employment tax.
- 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 for other creditors when the business is unable to pay employment taxes indicates 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 a third-party payer.
Employees are not “a responsible person” if the employee’s function is to submit payment as directed by a supervisor rather than determine which creditors are paid.
If your small business struggles to meet its employment tax obligations, don’t wait until the IRS is knocking at your door. Take action to correct the problem now.
Payroll taxes: how bad can it get
The IRS is aggressive in assessing and collecting penalties. Payroll taxes belong to the government, the government believes those who have not paid are taking its money. The government does not take this lightly and will not relent to collect the amounts it is owed. For a business with numerous employees, unpaid taxes add up quickly, and the penalty consequently assessed against a person can be huge. In addition, the penalty is not dischargeable in bankruptcy. Failure to pay payroll taxes can also result in criminal prosecution.
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