The IRS (Internal Revenue Service) reports that over 40 percent of businesses are fined each year for not being able to meet their payroll tax obligations. This is because they usually have payroll processes done manually and use software that is not connected to each other. This can lead to mistakes in calculations, filing, and late withholdings deposits. If you are a business leader and want to avoid these fines and penalties, here is what you need to know.
Required Payroll Taxes
- Federal unemployment tax
Employers must pay a federal unemployment tax based on the gross pay of all employees. This tax can be paid quarterly or annually and is documented on Form 940.
- Federal and state income taxes
Employers are required to withhold income taxes from their employees’ taxable wages and send them to the IRS and the appropriate state.
- FICA taxes
FICA taxes are taxes withheld from employee paychecks and matched by employers. These taxes go towards Social Security and Medicare. FICA taxes can be paid monthly or bi-weekly and are reported quarterly on Form 941. The amount employers have to pay differs from state to state but is usually around 0.6 percent.
When Do You Get Penalized?
You will be penalized if you don’t pay your payroll taxes on time. This penalty is a percentage of your gross payroll deposit, and it increases the longer you wait to pay. If more than ten days have passed since the date of the first IRS notice requesting the tax, or the day you received notice and demand for immediate payment, whichever is earlier, you may be liable for additional penalties.
If you deferred paying the employer’s share of payroll taxes under the CARES Act, you must pay at least 50 percent of that amount by January 3, 2022, with the rest due by January 3, 2023. If you don’t pay any part of the deferred taxes by the due dates, you’ll be charged a penalty, which will be 10 percent of the underpayment if it’s more than 15 days late or 15 percent if it’s more than ten days late and you’ve been given notice.
If you are unable to pay the full deposit, you can still make a partial payment. This will help to reduce the amount of penalties that you will incur.
Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty is a penalty that can be charged to an owner or partner of a business if they willfully fail to withhold employee pay and payroll taxes from federal and state agencies. This penalty can be very impactful, and it is crucial to be aware of it if you are an owner or partner of a business.
Here are steps you can take to lower your risks:
- Make sure your budget includes money for taxes. This may seem obvious advice, but it’s more common than you think for businesses to forget about taxes, especially very small businesses or sole proprietors. This is a quick and easy fix that can prevent a lot of problems down the line.
- Having a partner that can automate your payroll processes can help save you time and energy to focus on other essential aspects of your business. A good payroll provider will help prevent penalties from unpaid taxes, take care of administrative tasks, and make sure your employees are always paid on time and accurately.
- The IRS is the US government agency responsible for collecting taxes and enforcing tax laws. They regularly release news and updates on tax laws, deadlines, and tips. It’s important to stay informed of these changes to ensure you’re compliant with the latest tax regulations.
There are a few key things to remember if you want to avoid tax penalties. First, make sure that you file your taxes on time. Second, be sure to pay any taxes that you owe in full. Finally, if you are ever audited, cooperate with the IRS and provide any information they request. By following the tips mentioned in this article, you can avoid most tax penalties.