All businesses are required to deduct payroll taxes from their employees’ paycheck and deposit them to the IRS. Mistakes made with tax duties can lead to an audit, tax debt, and severe IRS penalties. To avoid the risks that come with non-compliance, it is essential to review past payroll taxes and understand how to resolve a potential payroll tax debt.
Payroll Tax Penalty
A payroll tax penalty or the Trust Fund Recovery Penalty (TFRP) is charged when employers do not collect and transfer payroll taxes to the IRS on time. Regardless of the type of business you operate, the IRS can penalize you on delinquent payroll tax deposits or filings. Examples of penalties for non-payment of payroll taxes are failure to file, failure to deposit, and failure to pay.
In order to calculate the TFRP, the IRS includes the unpaid income taxes plus the employee’s portion of the withheld Federal Insurance Contributions Act (FICA) taxes. If you are found to be non-compliant, you will receive an IRS letter regarding the penalty. You can make an appeal within 60 days from the date on the letter. If you do not respond to the letter, the IRS will send you a Notice and Demand for Payment, after which collection actions may be initiated.
Payroll Tax Debt Resolution
If you owe payroll taxes, you need to make immediate efforts to resolve it, as owing payroll taxes can put your business at risk. In order to resolve your payroll tax debt, you may use a payment plan such as an Installment Agreement.
You may qualify for a reduction or forgiveness of penalties, depending upon the reason for the non-compliance. It may be helpful to enlist a licensed tax professional to determine if you qualify for penalty abatement and which payment plan you should apply for. Choosing the right resolution plan is an important primary step for successful resolution of tax debt.
Avoid Payroll Tax Debt
Payroll taxes must be deducted from each employee’s paycheck and paid within three days of the pay date. Employers cannot borrow from payroll taxes or reduce the payroll taxes amount. Employers may use Publication 15, Employer’s Tax Guide, and Form 941, Employer’s Quarterly Federal Tax Return to completely understand their tax duties.