The Basics of Payroll Taxes

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Payroll taxes, also known as employment taxes, are the federal income taxes that employers withhold from their employees’ paychecks and deposit with the IRS. An employer is legally bound to withhold income tax from the pay of their employees and send it to the IRS. The amount of tax withheld largely depends on the income of the employee, and the amount of Social Security and Medicare taxes deducted by the employer.

Form W-2, Wage and Tax Statement, is used to report income from wages, tips and other compensation paid to an employee. The withholding tables on Form W-4 can be used to calculate the amount of taxes to withhold.

Unpaid Payroll Taxes

Employers that have unpaid payroll taxes may face heavy penalties and/or an audit. In certain cases, unpaid payroll taxes may mean the forced closure of a business and even imprisonment if the failure to file or pay payroll taxes was willful or intentional. In recent years, the IRS has concentrated on reviewing small businesses for payroll tax issues. Small businesses, which may not have experience handling payroll, tend to have the most payroll tax issues.

Even if you are paying payroll taxes, any differences between the amount of taxes withheld and other relevant data reported to the IRS can lead to an audit. Therefore, to avoid an audit, calculate the taxes you need to withhold carefully so that there are no discrepancies. In case of an overpayment, the IRS refunds the balance.

The IRS is particularly aggressive in collecting past due payroll taxes. They can shut down a business without court order, seize property or assets to satisfy a tax debt, and can initiate criminal investigation. To collect past taxes, the IRS can seize and sell any assets and/or property of anyone in the business who could be held responsible for paying employment taxes such as the business owner, accounting staff, partners, payroll service provider or shareholders. The IRS can even intercept any payments made to you by your customers.

Payroll Tax Penalties

Even without collection action from the IRS, non-payment, late-payment or underpayment of payroll taxes can result in penalties. Penalties are charged every month as long as the tax debt remains unpaid or unresolved.

  • If your federal employment tax deposit is one to five days late, a 2% penalty is charged. If your deposit is six to fifteen days late, a 5% penalty is charged. If your deposit is late by sixteen days or more, a 10% penalty is charged.
  • If your federal employment tax deposit is late and you receive a notice from the IRS concerning it, if you deposit the entire amount to the IRS within ten days of the notice, you are charged 10% in penalty. If you pay the entire amount due after ten days, the penalty increases to 15%.
  • If you do not withhold payroll taxes, or withhold but do not pay them to the IRS, you can face a penalty of up to 100% of the taxes owed.

There are additional penalties when you do not pay the employer’s portion of social security or Medicare tax.

  • If you do not file payroll taxes, you are charged a 5% penalty each mouth, with a maximum penalty of 25%.
  • If you file payroll taxes, but pay them late, you are charged a penalty of 0.5% for every month that the amount remained unpaid. The maximum penalty charged for non-payment of payroll taxes for each month is 25%.

Tax Evasion

Willful failure to collect or pay employment taxes is considered tax evasion and is a crime that can attract a fine of $250,000 for individuals or $500,000 for corporations. Depending on the severity of the crime, the taxpayer can also face imprisonment of up to five years. Borrowing from payroll taxes for any reason is not allowed.

From the author: Tax Resolution Legal Team
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