Small to mid-sized businesses are always at risk of being fined for failing to meet payroll tax regulations. Businesses with a small or medium number of employees are more prone to process payroll manually, thus increasing their odds of miscalculating, incorrectly filing, or making late withholding deposits. If you’d like to avoid tax penalties and fines, here’s what you should know.
Payroll taxes you’re required to pay
Businesses are required to pay state and federal taxes, including:
Federal unemployment taxes: employers pay a federal unemployment tax based on the taxable wage (with a limit of $7,000 per employee) 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 tax from their employees’ paychecks and distribute them to the IRS and corresponding states.
FICA taxes: Otherwise known as Social Security and Medicare taxes, these are withheld from employee paychecks and matched by employers. FICA taxes are reported quarterly on Form 941 and must be paid semi-weekly or monthly, depending on the size of the business.
Unpaid payroll taxes
If you have unpaid payroll taxes, your business will be penalized. The federal penalty is a percentage of your gross payroll deposit based on the number of days your payroll deposit is late.
Days Late to Penalty Percentage
1 - 5 Days: 2%
6 -15 Days: 5%
16 days or more: 10%
Unpaid amounts after 10 days of the first IRS notice requesting the tax, or the day when you received the notice and demand immediate payment, whichever is earlier: 15%
For example, ABC company has 102 employees and owes the IRS $39,000 for monthly payroll taxes. ABC company pays the $39,000 10 days after the due date. The company is hit with a 5% penalty on the $39,000 and now owes an additional $1,950. Depending on the size of your company, these additional fines can be a serious setback.
Failure to not deposit payroll taxes
Owners and partners of businesses can be held liable for willful failure to withhold employee pay and payroll taxes from federal and state agencies. This is referred to as the Trust Fund Recovery Penalty and is one of the harsher penalties leveled against companies by the IRS.
For example, let’s say ABC Company paid an employee $1,000. The paycheck says $90 has been withheld for income tax, as well as $62 for Social Security and $10 for Medicare. But ABC Company decided to get greedy and not send any of the withholdings to the IRS. Once the IRS finds out, and they always do, ABC Company will owe the original $162 plus an additional $150 for the penalty. Now, if ABC Company decided to get greedy with all their employees instead of just one, you can see how this could cripple their business, not to mention possibly result in jail time.
Mitigate risk with these three tips
1. Stay up-to-date with IRS announcements
The IRS publishes news releases, tax law updates, form deadlines, and more on a consistent and constant basis. Do your due diligence and stay updated.
2. Account for tax payments
Don’t overlook taxes in your budget! It may sound silly to state, but it’s a simple fix to prevent costly future headaches.
3. Automate tax payments with a trusted payroll provider
A trusted and efficient payroll software will automatically take care of federal and state taxes. Dominion sends your local, state, and federal taxes based on their due dates, so you can rest easy knowing all taxes are paid at the proper time.
With 50 years of experience, our payroll and tax teams are here to help you stay compliant with the latest payroll tax laws. If you’re curious about improving your payroll process, request a quote today to see how Dominion can assist your business.
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