Most Common Payroll Tax Problems and How to Avoid Them
Every employer in the U.S. is required by law to withhold employment taxes from employee paychecks and then submit that money to the Internal Revenue Service (IRS). Further, as an employer, you are required to keep track of these deductions and payments and report on them regularly. For a business of any size, this is a significant responsibility. Between the moment you withhold funds from your employees’ paychecks until you submit them to the IRS, plenty of things can go wrong. Mistakes or missteps along the way can result in accrued interest and fees, or even litigation—payroll tax problems you don’t need.
Employment taxes include federal income tax and the employees’ and employer’s share of FICA taxes—social security, unemployment and Medicare taxes. Naturally, the IRS has a significant interest in making sure that you collect, account for and pay these employment taxes properly.
Whether you’re new to managing payroll or have employed staff for several years, you can probably see how quickly payroll tax problems can escalate. Given the IRS’s determination to come down hard on those who fail to collect and remit payroll taxes, staying on top of this process is critical.
Of course, withholding and depositing taxes to the IRS can be a challenge, especially for smaller businesses or those struggling with cash flow issues. Here, we’ll look at common payroll tax problems and what you can do to stay out of trouble.
Administrative Issues
Business owners who run into payroll tax problems usually do so because they’ve missed one or more tax deposits to the IRS, or they’ve failed to report on the taxes they’ve collected and paid. Among the payroll tax problems most quickly solved are administrative issues related to reporting and deposits.
For reporting, your business will need to use Form 941 to report federal income tax, social security tax, Medicare tax and federal unemployment tax. These taxes are required to be reported quarterly. Form 940—required annually—is how you will report on matching amounts for some of these taxes.
As a separate matter, you will need to deposit the money owed to the IRS on a regular basis. The timing of deposits will be determined by the IRS itself. Unfortunately, you don’t get to choose whether you remit tax funds bi-weekly, monthly or quarterly.
Occasionally, a business will fall behind in paperwork and/or deposits required by the IRS. If your payroll tax problems amount to administrative issues alone, take the time to set up processes that ensure your forms and deposits are made on time. Make sure responsibilities are clear within your company, so everyone knows who is looking after each task.
Issues with Cash Flow
The period between collecting employment taxes from employee paychecks and depositing the money with the IRS can present a danger zone for some businesses. Depending on the size of your company and the interests of the IRS, the size of this window will vary. You may need to make deposits semi-weekly, monthly or as soon as the day after your employees are paid.
Of course, businesses of all sizes can struggle with cash flow. As you pay for supplies, rent and insurance, it might be tempting to use the money you should otherwise be depositing to the IRS. Warnings and consequences from the IRS can be slow, after all. They might feel less pressing than your need to buy the materials required to fulfill an order.
The trouble is, the longer you postpone remitting payroll taxes, the more your payroll tax problems worsen. If you put off paying the taxes you’ve withheld from employees, you will accrue both penalties and interest owing, not to mention the attention of the IRS.
Keep in mind, the IRS takes a hard line on payroll tax problems. In some cases, failure to pay payroll taxes that you’ve withheld can be considered a felony. You could be subject to punishment by fines or even time in prison.
Attempts to Cover Up Mistakes
Sometimes, as a business grows or changes employees, oversights happen. If you realize, along the way, that you’ve missed remitting payroll taxes for a period, it is important to come clean. It might be tempting to start fresh, going forward, and trust that new employees or processes will smooth over prior mistakes.
But, if you ignore previous mistakes, your payroll tax problems could escalate. Once you realize that you’ve missed remitting payroll taxes for a period, organize your records so you can take appropriate action. If you’re struggling to determine how much you owe, make sure that you recruit tax experts to assist you, rather than relying on the IRS alone for this information. The IRS may claim that you owe more than you do. While rectifying the situation before the IRS escalates is important, you don’t want to pay more than your fair share.
Dishonest Employees
Among the most unfortunate, but common, payroll tax problems involve dishonest employees. If you’ve had employees fail to remit payroll taxes—either on purpose, with an effort to siphon money from the business or by mistake with a failure to explain what they’ve done—you are suddenly in a tricky position.
Not only will the IRS come looking for withheld taxes, but your business will also be on the hook for interest and penalties. If you find yourself in this situation, it’s possible (but not certain) that you may be able to negotiate a settlement with the IRS. Make sure you engage a professional tax team to help you through this process.
Helping Yourself
If your business is struggling with payroll tax problems, you’re not alone. Between human error and the cash demands of a company in almost any industry, it’s easy to see how business owners can get caught off guard and quickly find themselves behind. The challenge, of course, is making sure you stay out of trouble with the IRS, which is heavy-handed on payroll tax problems.
The first step in helping yourself with payroll tax problems is to be proactive—report your finances and make your deposits on time. If you fall behind, rectify the missing payments and when you come clean with the IRS, make sure you keep nothing from them.
Of course, it’s not always that easy. You might not have the cash to make up for the missing funds all at once. Your records might not be clean enough to act quickly. Even worse, the IRS could be down your neck, making your payroll tax problems even more stressful.
In cases like these, the best way to help yourself is to recruit the right team of tax professionals. Tax experts have experience in all aspects of communicating and negotiating with the IRS. If you are a business owner or manager, responsible for the collection, reporting and deposits of employment taxes, it is important to work with a tax team you trust.
At Franskoviak Tax Solutions, we have helped thousands of clients with taxes and tax problems for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about personal and business taxes, IRS tax deadlines, payroll taxes, IRS tax relief and tax problems such as IRS tax notifications, payroll tax debt, delinquent taxes and more.
Start with a free consultation—we’re here to help you understand and navigate employment taxes, work through any payroll tax problems, and where required, negotiate with the IRS on your behalf.
