Tax-Related Penalties Every Employer Needs To Avoid

Collecting, reporting, and paying payroll taxes are among the many responsibilities an employer has as required by federal and state laws. If you are a “responsible party”, as defined by the IRs, or a corporate officer, payroll taxes not reported or deposited as required could be something you’re personally liable for.

Using a payroll service or someone else to do your payroll work such as reports and deposits, does not mean you are relieved as an employer of that responsibility to see that a timely basis of filing for tax returns is being made and that there is a correct and on time payment of all taxes - the IRS makes this clear.

What Payroll Taxes Employers Have To Pay

Here are the taxes the IRS requires employers to pay:

• Federal and state income taxes from employee pay that is withheld by the employer and must be paid to the IRS. Both federal income taxes and state income taxes are required to be paid by law.
• FICA taxes or the Social Security and Medicare taxes withheld from employee pay and matched by employers must be paid. A semi-weekly or monthly payments of FICA taxes must be paid depending on the size of your payroll. This must also be reported quarterly on Form 941.
• Federal unemployment taxes that uses the gross pay of all employees as a basis to make the payments. Form 940 reports these taxes, all of which are paid quarterly or annually.
• As per the state laws, state unemployment taxes must be collected, reported, and paid. 
• Annual wage and other payroll tax obligations, and tax reporting for employees on Form W-2 and contract workers on Form 1099 

What is the Trust Fund Recovery Penalty?

Businesses who collect money, account for that money, and pay that money to tax entities must expect to be imposed with the trust fund recovery penalty. Just like payroll taxes, sales taxes are a TFRP tax as well. The IRS can impose the TFRP due to the following:

• Wilful failure to collect tax,
• Wilful failure to account for and pay tax, or
• Wilful attempt in any manner to evade or have the tax or the payment thereof, defeated.

Make sure you understand the use of the term “willful”. The IRS defends this term as “intentional, deliberate, voluntary, and knowing, as distinguished from accidental. The attitude of a responsible person who with free will or choice either intentionally disregards the law is what “willfulness” means. It also means the person is plainly indifferent to its requirements. It some cases, it’s enough for a person to show willfulness when there is a reckless disregard of obvious facts.

What Else You Must Know About Penalties

The list we will give you is brief and general. Since penalties are complicated in nature, make sure you look for more details with the IRS on the penalties that will be assessed in Publication 15: Employer’s Tax Guide. Although these penalties may also to other similar forms, they are mostly for Form 941 taxes (withholding and FICA taxes).

1. If you failed to file Form 941 and similar forms, these are what you can expect: 

• 2% 1-5 days late
• 5% 6-15 days late
• 10% more than 16 days late or within 10 days of first notice from the IRS, maximum 15%.

2. The responsible party will be imposed with the Trust Fund Recovery Penalty for failure to pay payroll taxes when due. 

Note that the TFRP is 100% of the unpaid tax (income, social security, and Medicare). Interest accrues from the due date aside from the penalties.

You need to be careful of making late deposits because they are applied to the most recent liability. If you are, for example, required to make a deposit of $1500 every month and you don’t make your March 15 deposit but you make a deposit of $2000 on April 15 to catch up, the $1500 will be applied to April 15 and $500 to March 15. Due to the $1000 un-deposited for March 15, a penalty could be assessed on you for that.

You may still face fines for late payments even if you have evidence to prove that your failure to pay or report taxes wasn’t “willful” and you didn’t want to pay the Trust Fund Recovery Penalty. If you misclassified workers as independent contractors instead of employees, you may also be penalized for unpaid payroll taxes. Did you fail to prepare W-2 forms for your employees and you provided it to them by the deadline? For each statement that should have been sent or which was incorrectly prepared, you could be receiving a penalty of $50.