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Global Tax Insights

How to Minimize Payroll Tax Penalties

November 04, 2019

Attention employers: Stiff penalties await you if you don’t comply with payroll tax rules. Here are our tips.

Did you know that payroll taxes withheld by employers account for nearly 72% of all revenue collected by the Internal Revenue Service? Given this statistic, it’s no surprise that the IRS has made enforcing payroll tax compliance its top priority. Stiff penalties await employers who skirt the rules. Here are some practical compliance tips.

IRS Hot Button

“When individuals and businesses evade their employment tax obligations, it not only undermines our tax system; it also creates an unfair situation for people who are following the law. The IRS is committed to compliance in the payroll tax arena, which helps ensure fairness and faith in our tax system,” said IRS Commissioner Chuck Rettig. Earlier this year, IRS Field Collection and IRS Criminal Investigation undertook a special campaign to improve this area of compliance.

The campaign reminds employers that the corporate veil won’t shield responsible individuals from payroll tax obligations. Penalties can be assessed personally against any individual —including a shareholder, owner, director, officer, or employee — who’s responsible for collecting, accounting for and paying federal payroll taxes, and who willfully fails to comply with the law. In some cases, the IRS may seek restitution from more than one person and/or a third party — and responsible parties may even receive jail time for tax evasion. There are also successor liability rules on state and federal levels; so, one company can’t just reorganize itself into a new company and make past payroll liabilities go away.

Learn the Rules

What’s the best way to avoid penalties? Educate your human resource personnel and top managers about the basics of employment tax. In a nutshell, employers must deposit and report payroll taxes accurately and on time. At the federal level, these include:

  • Federal income tax withheld,
  • Social Security and Medicare taxes (for both the employer and employee),
  • An additional Medicare Payroll Tax on compensation that exceeds a threshold amount based on the employee’s filing status, and
  • Federal Unemployment (FUTA) Tax.

Employers also must report on the taxes withheld, as well as wages, tips and other compensation paid to employees. The IRS website provides a detailed list of employment tax due dates. In addition, each state has specific rules for depositing and reporting employment taxes at the state level. Employers must follow state payroll tax regulations in the states where their employees work.

Consider Using an Outside Payroll Provider

A reliable, third-party payroll service provider can help reduce payroll reporting stress. In addition to paying hourly and salaried employees, the provider can make timely payroll tax payments and handle recordkeeping.

Beware, however, that the use of an outside provider doesn’t protect employers from their payroll tax obligations. But, if a discrepancy is unearthed, the use of a reputable provider may demonstrate that a responsible individual didn’t intentionally, deliberately, voluntarily and knowingly disregard the requirements of the law.

Nobody’s Perfect

Mistakes sometimes happen, despite a company’s best efforts to stay atop the payroll tax rules. If an error is found, you’ll need to report adjustments to payroll taxes and to claim refunds of overpaid amounts. Corrections for underpaid taxes can be made electronically or with a check or credit card.

Delinquent employers also may establish a payment plan with the IRS to help get back on track. Although the IRS has little sympathy for employers that don’t understand the law or are unable to pay for financial reasons, the agency may be willing to abate or reduce penalties in certain hardship situations, such as a fire or natural disaster.

Our tax experts can help you understand the rules and, if necessary, file the appropriate tax forms to correct past mistakes. Contact us for more information.

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