As you know, payroll tax payments are federally mandated and your company must withhold the tax amount from its employees' paychecks. Once you collect these payments, your business is required to distribute them to the appropriate tax agencies. Despite your willingness to adhere to the law, mistakes can and will still happen.
As businesses process their payroll, many land themselves in risky territory with the IRS by making these common mistakes:
Mistake #1: Failing to understand the legal requirements
Payroll taxes are mandatory. Each and every business is responsible for withholding taxes from paychecks and depositing them appropriately. You must understand precisely how much to withhold and exactly when and where to deposit it.
Mistake #2: Underestimating how strict the IRS actually is
The IRS is particularly stringent when it comes to enforcing payroll tax collection. This government agency is responsive - if you fail to make payroll tax payments, their agents can even appear at your office to seize assets.
Mistake #3: Not knowing how expensive payroll tax penalties can be
Do you want to avoid paying thousands of dollars in fees you could have avoided? If you do not pay attention to IRS regulations and tax penalties, your penalties and interest will add up quickly. If you ignore IRS notifications for a lengthy amount of time, they can place liens on your bank accounts and other assets.
Mistake #4: Thinking they can fly under the IRS' radar
Many small business leaders feel as though they are not watched closely by the IRS due to having a small number of employees or comparatively low corporate income. However, this is a misconception; the IRS does watch small businesses and constantly enforces the law with them.
Mistake #5: Trying to "borrow" from payroll taxes collected
It is illegal to borrow any amount of money from your payroll taxes. Payroll taxes must be kept separate from other finances. If you borrow from the tax money, the IRS can present you with penalties.
Mistake #6: Not knowing the IRS can shut their business down
It takes a great deal of time and money to confront the consequences of improper payroll tax payment. In addition to legal fees and fines, the IRS can close your business before your case even goes to court.
Mistake #7: Waiting too long to seek legal advice
As a business owner, you should have a trusted lawyer ready to help you with business and financial issues as they arise. If you do run into trouble with the IRS and payroll taxes, you should talk to a lawyer immediately. It is best to consult a lawyer whose expertise is payroll tax.
Executive summary
The withholding, payment and reporting of payroll taxes is a legal requirement and should not be taken lightly. Know what you are required to report and pay when it comes to payroll taxes. Specifically, you must report on:
- All federal tax deposits made
- Annual federal unemployment tax return (Form 940 or 940EZ)
- Annual return of withheld federal income tax (Form 945)
- Employer's quarterly payroll tax return (Form 941)
- Wage and tax statements (Form W-2)
Need help or want more information about payroll? Contact Cindy McSwain using the information below.
Senior Vice President
Outsourcing Services
Cindy McSwain leads AGH’s outsourcing services group. Her team provides payroll, accounting, funds disbursement, controller, and other financial outsourcing services to numerous clients throughout the U.S. Prior to joining the outsourcing group, Cindy served AGH’s audit clients for 10 years, working with a wide range of middle-market, closely held and family-owned organizations.
Her current clients cross many industry sectors, including manufacturing and distribution, restaurants, retailers, medical and not-for-profit. She has participated in numerous SEC filings and public registrations and has experience in mergers and acquisitions. Cindy is a certified public accountant and a member of both the American Institute of Certified Public Accountants and the Kansas Society of Certified Public Accountants.
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