Companies and individuals frequently give their attention to federal and state income taxes when considering their tax liabilities. However, payroll tax responsibilities are also crucial for businesses to remember, as they may frequently be a landmine for the unsuspecting.
Given the wide range of things subject to withholding tax, it is typical for employers to make insufficient deductions. For instance, the IRS broadly interprets wage to mean “any compensation provided to employees in exchange for services.”
In light of this, the tax must be deducted from payments made in the form of salary, vacation pay, bonuses, commissions, and other taxable fringe benefits, among other things.
Due to insufficient amounts being deducted, federal law stipulates that employers are responsible for any tax underpayments that arise. Employers should, therefore, exercise special caution to preserve compliance in this regard.
Federal and state fines may be imposed on employers who either don’t withhold enough amounts or don’t pay the required amount of withholding tax. Employers who do not deposit the correct amount of withholding tax are often subject to a penalty of two to ten percent of the additional tax owed at the federal level.
The sections below show how to mitigate compliance issues in your company’s payroll tax.
Reducing IRS Compliance Issues
Employers use Form 941 to report the amounts deducted from employees’ paychecks for FICA tax and income tax withholding in accordance with Section 3402. Employers must submit Form 941-X to the IRS to fix any inaccuracies in Form 941’s employment tax reporting.
The adjusted return must include the following information:
- The period when the error was made
- The period being corrected
- A detailed account identifying the reasons for the correction
When the employer possesses the knowledge necessary to fix the problem, it is deemed to have been ascertained. In this analysis, timing is crucial since mistakes discovered within a specific window of time after the return has been submitted typically qualify for an interest-free correction.
Additionally, the following requirements must be met by employers:
- Fill out Form 941-X before the deadline for filing a claim.
- When the error is discovered, file Form 941-X by the due date for the revised return.
- By the time the return is filed, pay the IRS the amount that was underpaid.
Employers Who Meet the Requirements
Employers who comply with the aforementioned requirements frequently receive further relief from failure-to-pay and failure-to-deposit penalties. But they lose interest relief if they declare an adjustment but do not pay the underpaid tax on time.
Employers are also not eligible for an interest-free adjustment if they get a notice from the IRS regarding an underpayment.
Employers Who Fail Compliance
A $260 penalty is imposed on employers who either neglect to complete a Form W-2 on behalf of an employee for whom such a statement is necessary or who fail to include accurate and complete information on a Form W-2 that has been submitted.
However, employers can lower the fine by reporting the error right away and completing a related Form W-2c. Furthermore, by proving that the failure was due to a valid reason, employers may escape any sanctions at all.
By providing proof of significant mitigating circumstances or proving that the failure resulted from circumstances beyond the employer’s control, an employer can show reasonable cause for the waiving of fines connected to information returns.
Payroll tax compliance can be a tricky and time-consuming process. Your company needs to be updated with the ever-changing laws to avoid costly penalties, fines, and other liabilities.
To help mitigate payroll tax compliance issues, employers should ensure they are utilizing accurate payroll software and keeping up-to-date with the rules, regulations, and laws.
Axiom Tax Resolution Group can assist with your tax resolution in Birmingham, AL. As a tax resolution services specialist, our trusted team is ready to find a permanent solution to your tax problems with the IRS. Contact us today to learn more.