5 SCARY Payroll Tax Penalties

5 SCARY Payroll Tax Penalties (1201 x 601 px)

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How to Avoid & Manage Common Payroll Tax Penalties

Running payroll can be a stressful process no matter how detail-oriented you are. Making sure that each employee has accurate time tracking, correct wage designations, and ensuring that all filings are submitted in a timely fashion requires a fine-tuned process and careful management. One of the biggest fears is that we commit a blunder on the back end and incur payroll tax penalties.

The best way to avoid common payroll tax penalties is to understand what your business is responsible for and how to account for them on-time and accurately.

What is the Penalty for Not Paying Payroll Taxes?

There are a number of specific payroll taxes that your business needs to file and pay at different intervals. Depending on your payroll timing, organizational structure, and tax filings, the frequency and amount will vary, but you should always be paying attention to these five taxes:

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1. Federal and State Income Taxes

These are the taxes that everyone thinks of when it comes to Uncle Sam and April 15th, and it can be tricky when managing payroll for your business. It is crucial to withhold and report state and federal taxes from employee income at the proper rate and frequency. This is not typically an issue once you’ve been running payroll, but the setup can be daunting if it’s new to you.

Additionally, there is a common payroll fine called the Trust Fund Recovery Penalty (TFRP), which is the failure to withhold income, social security, or Medicare taxes. In addition to penalties impacting your business, interest accrues from the due date. Even if the missed TFR payment was unintentional, you may still face payroll fines for late payments.

2. State Unemployment Taxes

State unemployment taxes should be collected, reported, and paid according to your specific state laws. Quarterly reports are due on the last day of the month following the end of the previous quarter and can be filed by paper form or digital submission.

Employers that file their reports late will be charged penalties and interest until the report is properly filed and fines are paid off. The penalty for a late report is 0.1% of total wages paid in the quarter, with the minimum penalty being $35 and the maximum being $200. Fortunately, you can avoid this late penalty fee by filing the reports on time even if you’re unable to pay the taxes at the time of filing. You can make arrangements for payments of the overdue amount until it’s paid off.

3. Social Security and Medicare Taxes (FICA)

FICA taxes are the social security and Medicare taxes withheld from employee pay and matched by employers. They must be paid either semi-weekly or monthly, depending on the size of your payroll. They should also be reported quarterly on a Form 941.

Failure to file this form timely will result in different interest accrual rates depending on how late it is. Any form filed more than 16 days late or past 10 days of the notice from the IRS will result in a maximum interest rate of 15%.

4. Employee Annual Wage & Tax Reporting

These payroll items must be reported on Form W-2 for employees and Form 1099 for contract workers. It’s easy to be penalized for unpaid payroll taxes if you misclassify your workers as independent contractors when they are instead employees. If an employer fails to prepare and submit W-2 forms by their given deadline (generally around the end of January) for the previous year, they may be subjected to a $50 penalty for each statement that was not sent or prepared incorrectly.

5. Federal Unemployment Taxes

Federal unemployment taxes differ from state unemployment taxes as they are based on the gross pay of all employees. They are paid either quarterly or annually and are to be reported on the Form 940. For each month that the Form 940 is not filed past January 31st, there is a minimum penalty of 5% of the tax due with a maximum penalty of 25%. Additionally, for each month the tax is paid late, there is a failure-to-pay penalty of 0.5% and also has a maximum of 25% of the tax due. Luckily, if you have a reasonable cause for failing to file or pay, no penalties will be charged.

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Are Penalties and Interest on Payroll Taxes Deductible?

The IRS does not allow businesses or taxpayers to deduct penalties assessed on payroll taxes. Extensions can be filed via form 4868 to extend your tax filing deadlines, but it will not extend any deadlines for estimated payments. Similarly, any interest accrued on penalties is non-deductible as well.

We recommend using master calendar checks, software that reminds you of payroll tax deadlines, or a third-party financial service that will make sure your payroll taxes are accurate and on time. The amount of money you’ll save by staying ahead is significant.

Avoid Payroll Tax Penalties with Payroll Outsourcing in Phoenix, AZ

At PayTech, we have decades of experience helping small businesses protect and grow their hard-earned money. This means our specialists can help you take care of your payroll and tax needs without there being any risk of penalties and interest, and you won’t have to stress about doing it yourself.

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