Payroll Tax Penalties:
Consequences of Unpaid Payroll Taxes
The consequences of not paying payroll taxes range from small penalties for making a payroll deposit a day late to criminal penalties for not paying these taxes. Unpaid payroll tax penalties vary based on the situation, but it’s critical to note that the Internal Revenue Service takes these taxes very seriously.
If you have unpaid employment taxes, you’re likely going to face more severe consequences than if you have unpaid federal income taxes. This guide explains what happens when you get behind on payroll taxes. Need help with your unpaid payroll taxes now? Contact us today. At the W Tax Group, we can help with all kinds of tax issues, including back payroll taxes. Call us at 877-500-4930 to get started.
Key Takeaways:
- Payroll taxes include income tax, Medicare tax, and Social Security tax.
- They include taxes withheld from your employees’ paychecks and the employers’ matching portions.
- Employers who fail to deposit on time may face penalties as small as 2% of the balance due or as high as 100%.
- It is crucial to get caught up as quickly as possible and set up timely deposits to avoid unnecessary payroll tax penalties.
What Are Payroll Tax Penalties?
Payroll tax penalties are assessed when you pay these taxes late or fail to pay them entirely. They include late deposit penalties (aka failure-to-deposit penalties), as well as the trust fund recovery penalty. Unpaid payroll tax penalties are based on the amount of the tax liability, and they range from 2% of the taxes that were deposited late to 100% of the trust fund taxes.
What Are Payroll Taxes?
Payroll taxes refer to the taxes that you withhold from your employees’ paychecks, plus the matching amount that you need to pay. This includes:
- Social Security, Medicare, and federal income tax withheld from employee wages,
- Matching payments you make for Social Security and Medicare taxes, and
- Federal unemployment taxes.
Payroll Tax Versus FICA Taxes
These payments are sometimes called FICA taxes. However, FICA taxes aren’t exactly the same thing as payroll taxes. Short for the Federal Insurance Contributions Act, FICA taxes include Social Security and Medicare taxes. They don’t include income taxes withheld from employees’ wages.
Penalties for Late Payroll Tax Deposits
After you withhold income taxes and other FICA taxes from your employees’ paychecks, you need to deposit them on time. Paying payroll taxes requires you to deposit taxes online or over the phone, although the IRS prefers that you handle payments online via the EFTPS. You can’t pay payroll taxes through the mail.
Your deposit schedule depends on your tax amount listed on Form 941. But for most employers, these taxes are due on the 15th of the month after the employee has been paid.
Here are the penalties for making deposits for payroll tax payments late:
- 1-5 days late: 2% of the tax due
- 6-15 days late: 5% of the tax due
- More than 15 days late or within 10 days of the IRS’s first notice: 10% of the tax due
- 10 days or more after the IRS’s first notice: 15% of the tax due
For instance, if you’re supposed to make a $2,000 deposit, your penalty will be $40 if you are five or fewer days late. The penalty will be $300 if you make your deposit 10 or more days after the IRS sends the notice.
Trust Fund Recovery Penalty for Unpaid Payroll Taxes
If you don’t pay employment taxes at all, you may face the maximum penalty for a late deposit, and on top of that, you may face the trust fund recovery penalty (TFRP) for the unpaid taxes. This is one of the most severe penalties that the IRS imposes, and the only similar penalty is for tax fraud.
The trust fund recovery penalty is 100% of the trust fund taxes that you owe. This doesn’t include all of the payroll taxes that you owe–it is in addition to the owed taxes. Instead, it just includes the payroll taxes withheld from your employee’s paychecks.
Trust fund taxes are actually taxes paid by your employee. Say for example, that your employee earns $1,000. You withhold $62 of Social Security tax, $14.50 in Medicare tax, and $100 in income tax, and you cut your employee a check for $823.50.
Although you have to deposit the $176.50 that you withheld, your employee is the one who is actually paying that amount – that money came out of their wages. The money you collect belongs to the IRS as soon as it’s collected, and it technically is just meant to pass through your account to the IRS.
That’s why these are called trust fund taxes. Your employee and the IRS are trusting you to pay these taxes on behalf of your employer. If you withhold the income tax and FICA taxes without paying them, you are essentially stealing from your employees and from the government. That’s why the penalty for not paying these payroll taxes is so severe.
Who Is Responsible for Unpaid Payroll Taxes?
Generally, only the employer is responsible for their portion of the payroll taxes. However, employment tax laws allow the IRS to hold numerous people responsible for unpaid trust fund taxes including:
- Business owners
- Partners
- Corporate officers
- Employees
- Third-party payers
- Other responsible parties
Anyone that the IRS deems to be a “responsible party” can be held responsible for payroll taxes. Basically, the IRS can assign responsibility to anyone who made the decision to not pay these taxes. Say that a small business bookkeeper decides to pay the electricity bill instead of making the payroll tax deposit. They may be responsible, and the IRS may want to interview them about the penalties.
However, responsibility depends on the details of the situation. Now, imagine that the bookkeeper just writes checks and enters numbers into bookkeeping software as directed by the business owner. They don’t make any decisions about how the funds are allocated. Their boss tells them to pay the electric bill instead of the payroll taxes. In this case, the responsibility stays with the owner.
Can You Get Abatement for Payroll Tax Penalties?
You can qualify for first-time abatement or reasonable cause abatement for failure to file or late deposit penalties. You generally cannot get an abatement of the trust fund recovery penalty.
Deposit Requirements for People With Unpaid Employment Taxes
If you remit payroll taxes late once in a while, the IRS will usually just assess the late deposit penalty. However, if you have a habitual problem of making late deposits or not paying payroll tax at all, the IRS may require you to make special deposits.
In this case, you will receive Form 2481 (Notice to Make Special Deposits of Taxes). When you receive this notice, you must make all of your deposits within two days of the date that you withhold the taxes.
Consequences of Late State Payroll Taxes
If you have employees in a state with state income tax, you will also need to withhold state taxes from your employees’ wages. Then, when you pay taxes to the state, you pay the amount you withheld. You also have to pay state unemployment taxes. Late payroll deposit penalties vary from state to state.
How to Get Caught Up on Payroll Taxes
To get caught up on payroll taxes, first make sure that you have filed all of your payroll tax returns. If you haven’t made any payments, these returns will show you how much you owe. However, you’ll likely also owe payroll taxes for the quarter you are currently in, as you have not yet filed that return. Then, try to make a plan to pay the tax debt as quickly as possible. Here are some of the payment options.
Pay in Full
If you can pay the unpaid tax in full, you can minimize the payroll tax penalties that apply to your account. Even if you don’t have the funds outright, you may want to use a credit card or borrow money to deal with the unpaid tax bill. Businesses can take creative routes to borrow money for unpaid employment taxes, such as taking out a loan against your unpaid accounts receivables.
Set up a Payment Plan
The IRS is typically willing to let you set up a monthly payment plan on payroll taxes if you owe less than $25,000 and can pay off the balance in less than 24 months. If you owe more or need longer to pay, you’ll need to work directly with a revenue officer to set up payments. For best results, you should hire a tax attorney to argue your case.
Request an Offer in Compromise for Payroll Taxes
This is when the IRS lets you settle your payroll taxes for less than you owe. Usually, the IRS will only settle the employer portion of the payroll taxes. They won’t settle the trust fund taxes. Those must be paid by one of the other responsible parties if you want to get a settlement on the rest of the balance.
The only exception is for cases of payroll provider fraud. If your payroll service provider didn’t pay the payroll taxes and you believed they were, the IRS will probably not assess the trust fund recovery penalty against you.
With all of the resolution options to help you pay payroll taxes, you may have to meet specific criteria. For instance, you may not be able to set up a payment plan unless you stay current with all of the filing and deposit requirements while the plan is active. You may not be able to get an offer in compromise on your payroll taxes unless you close down your business. When you meet with a tax attorney, they will be able to tell you about the rules and processes for different resolution options.
FAQs About Payroll Tax Penalties
What happens if an employer doesn’t pay payroll taxes?
The IRS will assess payroll tax penalties against the employer. The IRS may require the employer to get on a special deposit schedule where they make deposits within two days of withholding the funds from their employees’ checks.
Can you go to jail for not paying payroll taxes?
Generally, no, but if the IRS decides that you have failed to meet employment tax obligations, you may face felony charges, a $10,000 fine, and five years in prison. This is on top of any other payroll tax penalties that the IRS assesses.
If the IRS decides that you have failed to meet employment tax obligations, you may face felony charges, a $10,000 fine, and five years in prison. This is on top of any other payroll tax penalties that the IRS assesses.
What if my employer withheld taxes but didn’t pay them?
Even though your employer didn’t pay the taxes, you can still claim the income as if it were paid when you file your tax return. You also get credit for the Social Security and Medicare payments that were withheld from your paycheck. You can also report your employer for employment tax fraud by calling the IRS.
Does the IRS audit payroll tax returns?
The IRS can audit your payroll tax returns to see if they were filed accurately.
Get Help With Unpaid Payroll Tax Penalties
Have you incurred payroll tax penalties? Want help applying for penalty abatement? Need help filing back payroll taxes? Regardless of your exact situation, we can help you out. The attorneys at the W Tax Group have extensive experience helping business owners with payroll tax penalties and other business tax issues. Call us at 877-500-4930 or reach out online to set up a time to talk.
