When it comes to payroll taxes, small issues can add up quickly.
If you own a small business, you are likely the CEO — Chief Everything Officer. In any business, it’s often easier to react to the challenges and opportunities of the day, rather than dig into detail-heavy tasks, including payroll. But unless you pay attention to the smaller details of payroll taxes, you could end up with escalating (and expensive) tax problems.
Let’s face it — like most things, it’s better to tackle tax problems when they are small, rather than repeat mistakes that could draw the attention of the Internal Revenue Service (IRS). While the IRS treats all federal tax problems seriously, payroll taxes are often treated with a heavy hand.
If you’re wondering if you have undetected tax problems, we’re here to help. Following, are a few things to think about — some of the most common tax problems encountered by small business owners and steps you should take to avoid trouble.
Failure to Withhold Federal Taxes
In the United States, every employer is required to withhold specific deductions from employee salaries or wages. In addition to withholding amounts for Social Security and Medicare, they must withhold federal income tax, as well.
Failure to withhold federal taxes is both an offense and a cue to the IRS that there are payroll tax problems at the business. On discovering you’ve not properly withheld federal taxes; the IRS will act swiftly. Business owners are not only required to pay taxes on the wages that were paid to employees, but they may also be hit with significant fines and penalties.
Failure to Pay Federal Taxes
Similarly, if a business is not withholding taxes from employees, it is almost surely not paying these taxes to the IRS. While not withholding taxes is one issue, it is another to withhold taxes and then fail to pay them to the IRS.
This mistake is unlike most tax problems — it amounts to stealing from the federal government and can be penalized the same way. If you collect federal taxes at the pay source and fail to give this money to the IRS, you may be criminally liable. You could face prosecution and you may even have to serve jail time.
Late Payments and Deposits for Payroll Taxes
While some business owners may assume they can take their time in paying the IRS — as long as they eventually make payroll tax deposits or payments — they’re not entirely right. If you collect federal taxes from the pay and wages of employees, you must make deposits and payments on time.
Let’s face it, the cash needs of a small business can be heavy at times. It may be tempting to ‘borrow’ funds withheld from employee wages to pay urgent bills or buy supplies, but it is important not to get caught in a cycle of borrowing from these funds. The IRS expects tax deposits to be made on the 15th day of the month.
If you run into tax problems, falling behind in your regular payments and deposits for payroll taxes, the IRS can charge 0.5% of the taxes due every month and can add a 25% penalty for tax deposits that it identifies as ‘considerably late’. In short, to avoid penalties and fees, it is important to make timely payments to the IRS.
Failure to Issue IRS Form W-2
Every year, your business needs to submit an IRS Form W-2 to each employee. The W-2 form illustrates critical tax information, such as wages paid, tax withheld, and benefits provided. In general, a W-2 needs to be issued for every employee who earned over $600 in the calendar year, or if any taxes were withheld.
By federal tax law, you are required to provide employees with a W-2 for the previous year by January 31st. If an employee is no longer with your company, it must be mailed to them, postmarked no later than January 31st.
Late W-2 forms are subject to a $50 fine each; if the IRS determines you are willfully neglecting to distribute these forms, you can expect to incur additional penalties and even sanctions.
Failure to Issue IRS Form 1099-MISC
Like many small businesses, you may use contractors or outside companies to help your business operate. The IRS requires you to identify these vendors and document the money you have spent through Form 1099. While the W-2 is used for employees, Form 1099 is generally used for contractors.
For example, if you pay an external individual or business more than $600 in a calendar year, you are required to issue IRS Form 1099 to them, and to forward copies to the IRS.
Examples of payroll-related money you might spend outside your business:
- Prizes or awards
- Payment to a freelance professional
- Payment to an attorney
- Payment to a sub-contractor
- Payment to vendors, such as printers, delivery services
Failing to issue and submit Form 1099 can be a clue that a company has larger tax problems. The IRS can penalize this misstep with a charge of $75 for each missing form and can require a business to pay up to 31% of the amount paid in federal taxes.
Set Your Systems Up for Success
Of course, mistakes happen. Human error is the cause of many tax problems for small businesses. Unfortunately, simple miscalculations can be penalized as if you had paid the taxes late on purpose. In other words, the IRS is not particularly forgiving when it comes to tax problems due to human error.
On the flip side, if miscalculations have resulted in an overpayment, you can apply for a refund, but will likely require a good amount of paperwork and will likely take time to be credited to your payroll tax account.
To avoid unnecessary errors, it is important to have checks and balances in place, as well as trusted tax and payroll professionals on your side. Whether you have accountants, payroll staff and bookkeepers in-house or outsource these roles, you need a trusted team, willing to check their work.
Find the Right Professionals
In addition to optimizing payroll and accounting staff, it is important to work with a trusted team of tax experts to minimize tax problems. A professional tax planning team can deliver peace of mind, whether you want to make sure payroll taxes are in good standing or have more complex tax problems— tax liens, delinquent taxes, tax relief or an Offer in Compromise.
A qualified tax team can review your payroll taxes with accuracy and attention to detail. When looking for the right team, be sure to look for experienced professionals, exceptional reviews, and a strong track record of success.
At Franskoviak Tax Solutions, we have helped our clients with tax planning for more than 30 years. We not only file personal and business taxes but also help with payroll taxes, IRS tax relief, and tax problems such as IRS tax notifications, tax liens, delinquent taxes, and more.
Headquartered in Michigan, with satellite locations in St. Petersburg, Florida, Cincinnati, Ohio, and Indianapolis, Indiana, Franskoviak Tax Solutions provides comprehensive tax services with first-class expertise and a personalized, boutique-style approach.