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What Are Unpaid Payroll Tax Penalties?

What Are Unpaid Payroll Tax Penalties?


Unpaid payroll tax penalties are charges imposed by the Internal Revenue Service (IRS) on an employer's account if they fail to collect, report, and remit employment taxes.


What are unpaid payroll tax penalties?

The IRS lists several requirements and penalties for failing to meet payroll obligations in IRS publication 15. Some are more common than others. The most common errors relate to Tax Forms 941 (withholding and FICA taxes), but some apply to similar forms.

  • A Trust Fund Recovery Fee (TFRP) applies in the event of non-payment of employment fees when due. 

  • Failure to provide employee information such as W-2 and other payees on Form 1099-MISC may also result in IRS penalties.

  • If you do not complete Form 941 and other similar forms, you will incur a 2% penalty if you are one to five days late, a 5% penalty if you are six to 15 days late, or 10% for late payments made 16 days or more late or within ten days of first notice from the IRS. The maximum penalty is 15% for amounts you don't pay more than ten days after receiving the IRS's first notice of tax owing.


Note: Deposits are applied to the recent liability, so be careful not to delay them.

How do unpaid payroll tax penalties work?

Let's say you need to deposit $1,500 per month. You did not make the deposit on March 15 but deposited $2,000 on April 15 to cover up. Of that payment, $1,500 is applied on April 15 and $500 on March 15, so you could be fined for the $1,000 not deposited by March 15.

You can also be penalized for unpaid employment taxes if you incorrectly classify employees as independent contractors. You don't have to withhold income tax or FICA from payments you make to independent contractors. Still, you could face penalties if the IRS determines they were misclassified and should have been paid as employees because they did not meet the independent contractor eligibility rules. 


Payroll taxes are Trust Fund Taxes.

Trust taxes are taxes levied on someone, usually a customer or employee, and then held by a company "in trust" until remitted to the appropriate tax authority. Sales taxes and payroll taxes are the most common types of trust taxes.

The internal revenue service can impose the trust fund recovery penalty (TFRP) for these unpaid taxes when a business fails to make the payments on time. The IRS may impose TFRP for:

  • Non-collection of taxes

  • Non-payment of taxes and failure to account for

The failure must meet these "willful" tests and must be committed by one of the parties responsible for the failure. The IRS defines willful as "voluntary, knowingly, and intentionally."


Note: In some cases, reckless disregard for obvious facts is enough to show willfulness.

Types of payroll taxes

The IRS calls payroll taxes "employment taxes." These are the ones your business is required to retain and pay when it has employees. These fees include the following:

  • Federal Income Tax: Must be withheld from employee paychecks and remitted to the IRS, as required by law.

  • Social Security and Medicare taxes (FICA): Commonly referred to and known as "FICA taxes," these taxes must be withheld from employees' paychecks and paid by employers.

  • Federal unemployment tax: must be paid by the employer, based on the gross wages of all employees.

  • State unemployment taxes: must also be collected, reported, and paid according to state law.

Suppose a business has multiple employees and withholds $5,000 in income tax and $2,000 in FICA tax from all employees' paychecks for a payday.

  • A federal income tax of $5,000 must be paid to the IRS.

  • The $2,000 in FICA taxes must be paid to the IRS at the National Insurance Administration, plus an additional $2,000 that the business owes as part of its FICA taxes.

The business must identify its employment tax withholdings in its accounts and make payments to the IRS when due.


What are the fines for not paying FICA taxes?

The penalty for failure to pay FICA and other employment taxes is based on late payment. It starts at 2% for taxes paid 1-5 days late and up to 15% for taxes paid more than ten days after receiving notice from the IRS of the unpaid tax bill.


What happens if you pay your taxes late?

If you file your taxes late, you will be charged a penalty based on late tax payment. Fines range from 2% to 15%.

Summary

  • All employers must withhold income, social security, and health tax from their employees' payroll and report and file these amounts with the IRS.

  • Employers must also pay any Social Security and Medicare taxes withheld and remit those amounts to the IRS.

  • The IRS imposes penalties ranging from 2% to 100% of unpaid tax when employers willfully ignore these requirements, depending on the type of tax.

  • Penalties may also apply if you simply delay sending the payments.


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Tiffany Gaskin
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