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