Jul 09, 2021What Happens if a Business Misses a Payroll Tax Deadline?
In the U.S., employers are responsible for setting aside a portion of their employees’ paychecks designated for federal income and payroll taxes. Although the process is relatively simple, failing to allocate these funds for payroll taxes can result in serious consequences. This article outlines the consequences of failing to pay these taxes and how employers can resolve payroll tax mismanagement.
Payroll taxes are funds allocated for federal use that are set aside from an employee’s paycheck. Employers are responsible for remitting both regular deductions from the employee’s paychecks and an amount that the employer pays out of pocket. For more information about payroll taxes and specific tax rates, see A Guide to Payroll Taxes in Plain English. Employers are primarily responsible for ensuring that these taxes are properly filed and paid, but if an employee suspects that their employer is failing to pay these taxes, they have a responsibility to inform the International Revenue Service (IRS) (see “Employer and Employee Responsibilities”).
Civil Penalties for Failure to Pay Payroll Taxes
Employers should use Form 941 to file their employees’ payroll taxes every quarter, but if they file incorrectly or miss payments, they will face certain penalties. Thankfully, the IRS makes a distinction between those who purposefully do not pay their taxes and those who mistakenly miss payments. Those who purposefully do not allocate these funds may be subject to criminal and civil sanctions (“Employer and Employee Responsibilities”), while the penalties are not as strict for those who make a mistake due to a “reasonable cause and not willful neglect” (Publication 15). In this instance, employers can explain themselves on their penalty notice in an attempt to get the penalty waived.
|2%||Deposits made 1 to 5 days late.|
|5%||Deposits made 6 to 15 days late.|
|10%||Deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due.|
|10%||Amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return.|
|15%||Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.|
(Figure Source: Publication 15 p. 31)
Criminal Penalties for Tax Evasion
The IRS outlines additional actions that could result in not only the above civil penalties but also criminal prosecution (or being brought to trial). These actions are as follows:
- Evading tax;
- Failing to collect or truthfully account for and pay over tax;
- Failing to file a return, supply information, or pay any tax due;
- Furnishing false or fraudulent Forms W-2 to employees or failing to furnish Forms W-2;
- Committing fraud and providing false statements;
- Preparing and filing a fraudulent return; or
- Committing identity theft.
(See p. 33 of Publication 15)
Businesses that are found to have willfully evaded paying their payroll taxes could face a fine of up to $500,000 and up to five years in prison (Tax Crimes Handbook p. 2).
Resolving Accidental Payroll Tax Mismanagement
More often than not, if a business misses a tax deadline, it’s likely by mistake. The IRS takes into account these accidental situations and provides a way for businesses to get back on track.
The IRS will send businesses a failure-to-deposit (FTD) penalty notice that outlines what the responsible party must do to properly pay the payroll taxes and any included penalties. If a business has a reasonable justification for missing a payment or paying the incorrect amount, they can provide an explanation to get a reduced or waived penalty. Additionally, if the business has not received penalties in the past, they can apply for the IRS’s first-time penalty abatement waiver to get the penalty waived.
In order to avoid these tax penalties, employers must be aware of their tax payment schedule as well as the appropriate amount they should be setting aside for their payroll taxes. The IRS will send each business a notification of the filing schedule, which helps employers keep track of deadlines. Employees who suspect that their employers are not properly filing their taxes have the right to contact the IRS to seek help on the issue.
How to Avoid Payment Mistakes
For companies strapped for time, keeping track of payroll deadlines and calculations can be a time trap. Fortunately, many third-party payroll services automatically handle these payments with very little setup on the front end. At Nimbl, we use Gusto to handle payroll for our clients, due to its inexpensive pricing and accurate filings. Regardless of which service you choose, selecting a payroll service can help save time, ensure accuracy, and prevent infractions.