You’re only one person and, as such, you can only do so much for your business. Once your business hits a certain point in its growth, you’ll have to add more employees to your payroll. More hands on deck means more work can be done, which ultimately will lead to your longstanding goal of continuous business growth. Having employees can complicate your business taxes further though, especially when it comes to payroll taxes.
What are payroll taxes?
Payroll taxes or employment taxes are taxes that an employer withholds from employees’ paychecks to pay to the IRS. As an employer, you will have to withhold the correct amount of taxes from your employees’ paychecks.
You will also have to add taxes that you must pay as an employer. For instance, the employee does not pay Social Security tax entirely; the employer pays for half of it.
The responsibility of depositing the withheld amount resides with the employer.
When are these taxes deposited?
Until the withheld taxes are actually paid to the IRS, they remain with you, the employer, as trust fund taxes. Trust fund taxes include income tax, social security taxes, Medicare taxes, railroad retirement tax or collected excise taxes, and other employment taxes.
When it comes to depositing the trust fund taxes, an employer can choose either a monthly schedule or a semi-weekly schedule. It’s important to note that you can’t switch schedules during a year. So, you’ll need to choose one before the start of each calendar year.
You can use Forms 940, 941, and 944 to do your tax reporting. When depositing any funds, you may use the electronic funds transfer (EFTPS).
Why is paying payroll taxes important?
Payroll tax debt is no joke. In an effort to encourage employers to pay withheld taxes promptly, Congress passed a law that allows the IRS to charge the Employment Taxes and the Trust Fund Recovery Penalty (TFRP). The IRS enforces this penalty if they cannot collect the required payroll taxes from a business. Negligent employers must pay a failure-to-deposit fee of up to 15 percent for not making deposits on time.
You can also face collections actions from the IRS for failing to deposit, file, or pay your payroll taxes. Therefore, both timely withholding of income and paying all payroll taxes are essential for all qualifying businesses.
If you need help figuring out your payroll taxes and want to avoid the risk of falling into payroll tax debt, contact us for solutions like our PayrollSolver™.
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. In order to avoid the risks that come with non-compliance, you should review past payroll taxes. Understanding how to resolve a potential payroll tax debt can also help ensure your business grows as it should.
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 the IRS finds you 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 don’t respond to the letter, the IRS will send you a Notice and Demand for Payment, after which they may initiate collection actions.
Payroll Tax Debt Resolution
Do you owe payroll taxes? Then, 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
You must deduct payroll taxes from each employee’s paycheck and pay them within three days of the pay date. Employers cannot borrow from payroll taxes or reduce the payroll taxes amount. You may use Publication 15, Employer’s Tax Guide, and Form 941, Employer’s Quarterly Federal Tax Return to completely understand your tax duties as an employer.