Payroll Tax Penalties

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The Internal Revenue Service is much more aggressive collecting payroll taxes than they are in collecting Federal Income Tax. Payroll taxes fund social security and Medicare and come from a definite and continuous source, namely, wages. In addition, because payroll taxes are deducted from employees’ paychecks, the IRS makes every effort to ensure the employee contributions are deposited with the IRS.

Federal and state payroll taxes include:

  • Federal and state income taxes – withheld from employee pay and paid to the IRS and your home state as required by law.
  • Social Security and Medicare – withheld from the employee’s paycheck and matched by the employer. FICA taxes must be paid either semi-weekly or monthly, depending on the amount of your payroll, and are reported quarterly on Form 941.
  • Federal unemployment taxes – This is a tax on the first $7,000.00 earned by each employee. They are paid quarterly or annually and are reported on Form 940.
  • State unemployment – This is a tax on the first $7,000.00 earned by each employee and paid to their respective state.

Late Payment Penalties
For amounts not timely deposited, the penalty rates are as follows.
2% – Deposits made 1 to 5 days late
5% – Deposits made 6 to 15 days late
10% – Deposits made 16 or more days late
15% – Amounts still unpaid more than 10 days after the date of the first notice sent from the IRS asking for payment

Trust fund recovery penalty or the 100% Tax  If federal income, social security, or Medicare taxes that must be withheld aren’t withheld or aren’t deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. The penalty is the full amount (or 100%) of the unpaid trust fund tax. This penalty may apply to you if these unpaid taxes can’t be immediately collected from the employer or business.
The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so.

A responsible person can be an officer or employee of a corporation, a partner or employee of a partnership, an accountant, a volunteer director/trustee, or an employee of a sole proprietorship, or any other person or entity that is responsible for collecting, accounting for, or paying over trust fund taxes. A responsible person also may include one who signs checks for the business or otherwise has authority to cause the spending of business funds.