Employment laws are getting more complex, and business taxes make it harder to remain compliant. According to the IRS, more than 40% of businesses are fined each year for failing to meet payroll tax obligations. These organizations are at risk because they tend to run payroll through manual processes and disconnected software, leading to miscalculations, incorrect filings and late withholdings deposits. If you’re a business leader and want to avoid fines and penalties, here’s what you need to know.
What Payroll Taxes Are You Required to Pay?
State and federal taxes include:
- Federal unemployment tax: Employers must pay this tax based on the gross pay of all employees. These taxes can either be paid quarterly or annually and are documented on Form 940.
- Federal and state income taxes: Employers must withhold these taxes from employee taxable wages and distribute them to the IRS and proper states.
- FICA taxes: These taxes are more commonly referred to as Social Security and Medicare taxes. Unlike income taxes, these are withheld from employee pay AND matched by employers. FICA taxes must be paid either monthly or bi-weekly, depending on the size of your payroll. FICA taxes are reported quarterly on Form 941. Employer portions differ from individual states, In most states employers only pay 0.6%.
What Happens if You Have Unpaid Payroll Taxes?
There are no ifs, ands or buts: If you have unpaid payroll taxes, you will be penalized. Specifically, you’ll be fined a percentage of your gross payroll deposit based on the number of days your deposit is late.
Here are the penalties for failing to deposit payroll taxes on-time:
|6 – 15 days||5%|
|16 days or within 10 days of first IRS notice||10%|
|More than 10 days after the date of the first IRS notice requesting the tax, or the day when you received notice and demand for immediate payment, whichever is earlier.||15%|
Example: Sole proprietorship, Tim’s Software, Inc. has 100 employees and owes the IRS $39,000 for monthly payroll taxes. The company pays the full amount 10 days after the due date. Tim is slapped with a 5% penalty on the $39,000 deposit and now owes the IRS an added $1,950. For smaller organizations, this type of fine can be a major setback.
Companies that elected to defer the employer’s share of payroll tax deposits under the CARES Act must have deposited at least 50% of the deferred amount by Jan. 3, 2022. The balance of the deferred amount is due Jan. 3, 2023. Not depositing any part of the deferred taxes by the due dates will result in a penalty for failure to deposit taxes on the entire deferred amount retroactive to the original due date. The penalty is 10% of the underpayment for more than 15 days and 15% if the tax is not paid within 10 days of the first notice sent to you.
What if you can’t pay the full deposit? Pay the taxes you can afford! Even a partial payroll tax payment will reduce the amount of penalties you’ll receive.
Penalties for Not Depositing the Payroll Tax
As an owner or partner, you can be held personally liable for willful failure to withhold employee pay and payroll taxes from federal and state agencies. This is called the Trust Fund Recovery Penalty and it’s one of the most impactful penalties charged by the IRS.
How much will it cost?
Example: Let’s say you pay an employees $1,000. Their paystub notes that you withheld $90 for income tax plus $50 for Social Security and $10 for Medicare. But you didn’t send any of that money to the IRS. In this case, the unpaid tax bill is $150. Now you owe this amount AND that amount again as a penalty, doubling your bill. When you employ dozens of workers, this penalty can add up quickly.
Keep in mind these are also criminal penalties that can result in a $10,000 fine and/or imprisonment for up to five years. Here’s what you can do to make sure you stay on the right side of the law.
3 Tips to Mitigate Risk
- Ensure your budget accounts for tax payments. You might be rolling your eyes at this advice, but it’s more common than you might realize for organizations to overlook taxes, especially very small employers or sole proprietors. This is a quick, simple fix that can prevent a lot of headaches.
- Automate payroll by partnering with an HR & payroll provider. If you want more time to work on important, strategic initiatives, consider automating your payroll processes. The right partner will help prevent payroll tax penalties from unpaid taxes, cut down on administrative tasks and ensure your employees are paid accurately and on time.
- Stay up to date with IRS announcements and resources. The IRS is continually publishing news releases, tax return news and tax law updates, tax tips and form deadlines, so it’s important that you, your accountant or your payroll provider stays on top of things.
How Can Paycor Help Mitigate Your Risk?
Paycor has spent more than 30 years perfecting payroll. Our solution is the easiest and most powerful solution for small to medium-sized businesses on the market.
- Our dedicated tax experts help you with payroll tax compliance, workers’ comp, and federal and state laws and regulations.
- We help eliminate administrative processes by empowering your employees with self-service access.
- We help you maintain accurate employee pay records.
- We improve your payroll service with general ledger integration and helpful HR resources like employee policies, job descriptions and custom templates.
*This article does not contain legal advice. The information is provided for general educational purposes only and is not a substitute for legal advice.