“Making payroll” – that is managing a small business so that paychecks are delivered on time even when the unexpected occurs – can be one of the hardest parts of a small business owner’s job. One thing certain to make that job even harder is a payroll tax mistake that can lead to IRS problems.
The IRS isn’t very receptive to excuses when it comes to timely payment of payroll taxes, and neither are state tax authorities in the 41 states which have state income tax withholding rules.
When a cash crisis occurs, it can be tempting to “borrow” money withheld from employee paychecks as a short-term loan for urgent expenses, but don’t succumb to temptation. The IRS views this as a cardinal sin, and can result in both civil and criminal penalties that are very hard for a small business owner to overcome.
The IRS publishes an annual guide to payroll tax compliance called The Employer’s Tax Guide. You can download the 2013 payroll tax PDF by clicking here.
Here are five things that every small business owner needs to know about payroll taxes to avoid IRS problems.
1. Penalties Build Quickly
Any business can find itself facing a mountain of debt that can result in a total shut-down of operations if payroll tax penalties are allowed to build up. It doesn’t take long for any of the three major payroll tax penalties from the IRS to add up.
- Failure to file
- Failure to deposit
- Failure to pay
The penalty for any of the three can be as much as 33% of the total amount owed, plus interest.
2. Timely Deposits Are Essential
Payroll taxes must be paid to the IRS within three days of the payroll check date. In general, you must deposit federal income tax withheld and both the employer and employee social security and Medicare taxes using electronic funds transfer through a payroll service or your bank.
Late fees and penalties begin accruing on the due date – there is no grace period.
3. The IRS Watches Small Businesses
Small businesses are the largest source of uncollected taxes, so the IRS carefully watches small business owners. This is true all the time, but special attention is paid to small businesses during down economic cycles, within the first two years after an employer identification number (EIN) is requested for a start-up, and when a small business hires seasonal help or has a flexible workforce that grows and contracts.
4. Owners Are Personally Liable
The Trust Fund Recovery Penalty (TFRP) gives the IRS the power to go after small business owners individually for payroll taxes owed. There is no “corporate veil” protection that the IRS cannot surmount if they decide to use TFRP – and the decision to use it is at the discretion of the IRS.
The trust fund recovery penalty is equal to the income taxes, social security taxes, and Medicare taxes withheld from employee paychecks. The trust fund recovery penalty is authorized by Sec. 6672 of the Internal Revenue Code.
There is also a non-trust fund component to employee payroll withholding. Non-trust fund taxes equal the employer’s required matching to the employees’ social security and Medicare fund. These contributions are made from the employer’s own pocket rather than deducted from employee paychecks. There is no personal liability for non-trust fund withholding amounts; they can only be collected from the business.
5. You Can Face Criminal Penalties
Some small business owners get into trouble with the IRS because they think that a micro-business with one or two part-time employees is “too small to register”. Don’t bet on it. The threshold for referral to the criminal investigation division is very low.
Whether you owe a few dollars or thousands of dollars, the Department of Justice needs only to prove that you intentionally did not file or pay. As soon as an investigation begins, the IRS can freeze your bank accounts, making it nearly impossible for most businesses to stay open.
As part of an investigation, the IRS can get bank statements, bank signature cards, and cancelled checks directly from your bank – and you most likely won’t know that the bank has received a summons to turn the records over until after they have been delivered to the IRS.
With the bank information in hand, the IRS will try to decide who had the authority to direct tax withholding to other purposes instead of paying the IRS. So anyone with signature authority on checking accounts or bank debit cards may find themselves part of the investigation, and if the IRS is considering exercising the Trust Fund Recovery Fund Penalty clause in the IRS Code, each and every one of those individuals may find their personal bank accounts frozen while the investigation is underway.
Avoiding Payroll Tax Troubles
It’s really simple to avoid payroll tax troubles. Just pay every penny owed, on time. A payroll service and tax partner with the experience and integrity to keep the IRS away from your door can help any business avoid payroll tax trouble.
1800Account.com offers comprehensive, flat-fee payroll and tax services for small businesses that allow business owners to focus on running and growing a business while the company’s CPA’s, Enrolled Agents, Accountants, Bookkeepers, and payroll specialists take care of the sometimes tedious details that can lead to IRS problems. For information about payroll tax services, click here. For information about tax services, click here, and for information about bookkeeping services, click here.