Why Do Small Businesses Incur So Many Payroll Tax Penalties?

The IRS issued $4.5 billion in employment tax penalties last year. Since large companies are generally better equipped to stay on top of the minutiae involved in maintaining compliance and avoiding payroll errors, small businesses often bear the brunt of the penalties. Here are two of the main reasons that small businesses often have more difficulty with payroll tax compliance.

1. The number of rules

If you have seen the employer’s tax guide issued by the IRS, you will know that it is rather lengthy and complex. It contains rules concerning different types of employees, different types of work and different types of pay; it also includes plenty of details about the penalties you can incur. Hidden within the avalanche of information, employers must find what is relevant to their company when they are doing their payroll. Given that 40 percent of companies are calculating payroll taxes by hand and 46 percent don’t use an accountant at all, it's no wonder that the penalties are piling up.

2. The changing nature of the rules

As your company grows and you hire different types of employees, you must file your payroll taxes differently. Changes in the nature of your payroll taxes can come from many different places based on your individual company, including:

* Social Security
* Medicare
* Federal withholdings
* State withholdings

Now it simply is not enough to do your payroll the same way from year to year. Keeping track of all that is owed based on each employee can become a task that is just not manageable for most small businesses; that is when the penalties and interest start to rack up.

Each year thousands of companies make mistakes in the payroll process because of how complex the regulations have become. Many employers turn to other companies for their payroll services to relieve some of this pressure. Find out if outsourcing payroll is right for you; then get in touch with us to learn more.


Sources: BusinessWeek, Internal Revenue Service