If you own a business that has even one employee, then you run the risk of being assessed a payroll tax penalty by the IRS (Internal Revenue Service) if you are not careful each and every time that you issue a paycheck to those who work for you.
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In some cases, even if you unknowingly make a mistake, you could end up losing your business.
The IRS tends to specifically target small businesses on issues of tax debt – especially in tough economic times. So, having a good understanding and review of what to look for up front can be helpful in avoiding a penalty, a hefty fine, or having the IRS put a lock on your company’s front door.
Common Payroll Tax Mistakes
There are three common issues that small businesses often face with regard to payroll taxes. These include:
· Failure to Pay – All employers in the United States are required to withhold federal income taxes, as well as Medicare and Social Security taxes, from their employees’ salaries or other wages.
· Failure to Deposit – Payroll tax deposits and payments must also be made by companies on time, or else penalties and / or fines may be faced.
· Failure to File – Businesses are required to ensure that all employees and / or subcontractors who have performed work for the company have the proper forms as they relate to their compensation for income tax purposes. All employees of a business must have their W-2 by January 31st of the year following the tax year in question. (If an individual is no longer employed at the company, the envelope that contains the W-2 form must be postmarked by January 31st).
Many businesses may also have simple errors in math or calculation with regard to tax withholding rates on tax reporting forms. Unfortunately, even if these mistakes are unintentional, they could still lead to penalties and / or fines.
Penalties and Fines
While it may not be uncommon for small businesses to encounter some type of tax issue at one time or another, when it comes to payroll taxes, the IRS takes it very seriously. For example, a company that fails to withhold federal income taxes can be required to pay a fine to the IRS.
In addition, if a business withholds taxes from its employees pay, but does not pay these funds to the IRS, the business owner could be held criminally liable and be punished via prosecution, or even through jail time.
The funds that are withheld from employees through payroll taxes technically do not belong to your business and they must be paid to the government either through a tax filing service, via phone, or at a bank, within three days following the pay date.
What many business owners may not be aware of is that even though the money flows in and out of their company, the IRS can actually come after the company owner personally for payroll taxes that are owed. This is because the IRS is allowed to access the Trust Fund Recovery Penalty, or TFRP against both the business owner and shareholders (if applicable) – even if your company is “protected” as a corporation or an LLC.
How to Reduce or Eliminate Your Penalties
If you’re faced with an IRS penalty, the first thing you need to do is address it. IRS collection tactics can be extremely aggressive, so you don’t want to do anything that will make the matter worse. The IRS does have the authority to lock your company’s doors and put you out of business quickly. In addition, it can also intercept owed funds from your customers.
There are forms that can be filed, however, prior to doing anything, it is typically the best course of action to consult with an expert in the area of payroll taxes. Because all situations can be different, meeting with a professional can help you in determining which direction will be best for you and your company to proceed.
Taking the Next Step Towards a Resolution
If your business is facing a payroll tax issue against the IRS, this is not an issue that you want to face alone. Having an expert on your side to walk you through the process can be much more beneficial.
This can help you to ensure that you have the proper knowledge regarding the situation that you are facing – especially as payroll tax law does tend to change over time. It can also help to have a reliable tax debt expert that you can turn to.
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