Delinquent Payroll Taxes = Harsh Penalties for Employers

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payroll-taxesFederal Tax Deposits (FTDs) for Form 941, or Employers Quarterly Federal Tax Return, are made up of withholding taxes or trust funds (income tax and Federal Insurance Contributions Act (FICA) taxes, which are Social Security and Medicare held in trust), that are actually part of an employee’s wages, along with the employer’s share of FICA.  FTDs for Form 940 are taxes paid by the employer to provide for unemployment compensation to workers who have lost their jobs. Only the employer pays FUTA tax; it is not deducted from the employee’s wages.

These taxes must be paid as they become due in order to avoid penalties. If you have a deposit requirement, you must deposit electronically, which can be done via the Electronic Federal Tax Payment System (EFTPS).  EFTPS deposits must be initiated by 8 p.m. Eastern the day before the due date. EFTPS is also used to pay other types of taxes, not just employment taxes.

Being a business owner is a liberating experience.  But with freedom comes responsibility. It’s imperative to pay the IRS on time. You must make business payroll taxes a priority, as this can potentially make or break your business. If you neglect to pay these taxes on time, you’ll receive a warning from the IRS. If the issue is not resolved in a timely manner, there are several possible consequences:

  • The IRS imposes a very harsh penalty when business payroll taxes are not paid. The penalty is 100% of the taxes owed. This is called “Trust Fund Recovery.” Remember, when your payroll tax obligations are not met, you are breaking a binding contract you have with the United States government.
  • IRC Section 6672(a) states that the blame for not paying business payroll taxes goes to “every responsible person” who willfully neglected to pay the payroll taxes. This means accountants, bookkeepers, and anyone with check signing ability can potentially get the blame for the tax debt.
  • Even if there was no malicious intent, the expensive “Trust Fund Recovery” penalty is imposed. For example, some business owners might fail to pay their payroll taxes out of desperation; they may have been trying to save the company from bankruptcy or protect their employees. However, the reasons for delinquency are irrelevant; penalties and debt will still be imposed.

According to the IRS’s official website, thousands of taxpayers have outstanding Trust Fund Recovery penalties as a consequence of being delinquent on business payroll taxes. The amount owed is in the billions and growing.

Working with a Professional Employer Organization, or PEO, is a great way to relieve stress, reduce liability and avoid penalties.  As the employer of record, a PEO assumes responsibility and liability for payment of wages and compliance with rules and regulations governing the reporting and payment of federal and state taxes on wages paid to employees. PEOs have long established their role as reporting income and handling withholding, FICA and FUTA.

Contact the author directly at nicole.earnhart@staffone.com.  This is the nineteenth post in our 30 Days of HR Outsourcing series. Visit us each day in November for information on HR, payroll, benefits, workers’ comp and risk management topics, or subscribe to be notified instantly when a new post is published.

Photo copyright: Karen Roach