What options does the taxpayer(s) have to resolve the issue of unpaid payroll taxes.
- If the taxpayer(s) feel they are not responsible, they can challenge the matter before the IRS from the investigation level through the appeals level either on their own or with representation.
- Restructure or reorganize the business to reduce the taxpayer(s) exposure for unpaid payroll taxes.
- Offer ongoing strategies to reduce exposure to the amount owing such as designating payments to the trust fund portion of the payroll tax liability.
- Make an attempt to negotiate an Installment Agreement with the IRS.
- If unable to pay the payroll taxes due to financial hardship, negotiate to have the IRS place you in uncollectable status or request an offer in compromise.
Approximately 86% of the annual revenue collected by the IRS comes from payroll taxes remitted by employers. Specifically, approximately 50% of all federal revenue comes from individual income taxes while 36% comes from payroll taxes assessed on the wage or salary paychecks of almost all workers used to fund Social Security, Medicare and unemployment insurance. Payroll taxes withheld and deposited is an important source for operating the federal government. There are serious consequences when businesses fail to collect, report and deposit payroll taxes. Yet sometimes businesses find themselves desperately needing funds to remain in operation. Unable to secure financing from lending institutions and secondary sources, businesses look for other sources of funds which can include payroll taxes withheld from their employees’ paychecks. Troubled businesses begin borrowing the payroll trust fund believing they can repay the sums before the due date for depositing with the Internal Revenue Service (IRS). Failure to meet the responsibility of repaying the payroll trust fund can result in businesses facing huge penalties sometimes as much as 40% plus interest.
Payroll taxes consist of the following components:
- Withholding and depositing with the IRS employee’s estimated income taxes.
- Withholding and depositing with the IRS employee’s portion of FICA, i.e. Medicare and social security taxes (which is approximately 7.65% of employee’s wages), and
- Withholding and depositing with the IRS employer’s portion of FICA, i.e. Medicare and social security taxes (which is approximately 7.65% of employee’s wages).
The trust fund portion consists of 1. and 2. above which serves as the basis for assessing an individual responsible for the trust fund recovery penalty. If there are multiple individuals involved in managing the business, the IRS can enforce collections from any or all of them.
The narrative below provides a simple example of the substantial penalties one can incur as a result of unpaid payroll taxes:
Example: Assume a business paid an employee $2,500 and noted on their paycheck that it withheld $400 in income tax plus $191.25 of employee’s portion of Social Security and Medicare taxes, the trust fund recovery penalty would be $591.525 plus interest.
In addition, penalties for failure to timely file payroll tax returns can equal 15% plus an additional 25% penalty for failure to timely pay the payroll taxes. This translates to 40% of the underlying payroll taxes due plus interest. In the example above the business could end up owing $782.50 (including the employer portion of Social Security and Medicare taxes) in payroll taxes plus over $313 in penalties and interest.
Over time, and with multiple employees, trust fund recovery penalties can be crippling. In addition, when penalties and interest are added to the unpaid payroll taxes the amount owing to the IRS can equal 140% or more of the original balance.
Need help with a payroll tax issue? Contact The W Tax Group to speak with one of our tax professionals. At The W Tax Group we can help you get the answers you need.
Call (877) 500-4930 for your free consultation.