Manage Your Business's Payroll Taxes Correctly

PAYROLL TAX

One of the most common federal tax issues we handle is dealing with businesses who have failed to comply with their Federal Unemployment or Employee Withholding payroll tax obligations. There are many reasons which may cause an employer to fail to timely pay these tax obligations. In many cases, struggling businesses may feel compelled to choose between paying their taxes and keeping their business financially solvent. The problem with this practice is that payroll taxes are not a "loan" from the IRS or a temporary solution for fixing an ailing business’s economic difficulties. Failing to withhold or submit payroll taxes in a timely manner can result in penalties and interest, both of which can rapidly increase a business’s tax liability, thereby making financial recovery much more difficult.

Below are general overviews of the two types of federal payroll taxes and the potential consequences a business may face for failing to meet those obligations.

FEDERAL UNEMPLOYMENT TAX ACT (FUTA)

IRS tax return Form 940 is used to report an Employer’s Annual Federal Unemployment Tax (FUTA). This tax applies to the first $7,000 paid in wages to each employee per calendar year and assists in financing federal unemployment compensation for workers who have lost their jobs. This tax is the employer’s responsibility and may not be collected or deducted from an employee’s earnings. It is required for all employers who meet the following criteria:

  • Paid $1,500 or more in wages to an employee(s) during one calendar year;
  • Employed one or more workers during a calendar year for at least 20 weeks for any part of a day (this may include temporary workers or part- or full-time employees). Do not include partners.

Form 940 must be filed by January 31 for the previous tax year. Please be aware that the FUTA is independent from any state unemployment tax, which, if applicable, is required to be reported and paid separately.

QUARTERLY EMPLOYEE WITHHOLDINGS

IRS tax return Form 941 is used to report Social Security taxes, Medicare taxes, and Income taxes withheld from all employee wages. Although employees are responsible for these taxes, it is the employer’s responsibility to withhold and transfer the funds to the IRS on a quarterly basis. For this reason, they are sometimes called "Withholding Taxes" or "Trust Fund Taxes."

Form 941 must be filed quarterly and report the following information:

  • All wages paid to employees;
  • All tips received by employee(s);
  • The amount of Social Security and Medicare taxes for which the employer and employee(s) are responsible;
  • The amount of Medicare tax withheld from employees;
  • The amount of Federal Income tax withheld from employees;
  • Adjustments to Social Security and Medicare taxes
  • Any credit(s) for COBRA premium assistance payments

FAILURE TO COMPLY WITH PAYROLL TAX REQUIREMENTS

The IRS has several penalties it can assess against businesses that fail comply with federal payroll tax obligations. Additionally, interest rates accrue on any amounts owed as well as on the imposed penalties. The IRS may penalize businesses for making insufficient payments, filing returns that are incorrect, failing to properly withhold payroll taxes, failing to file or timely file payroll taxes, and failing to deposit the tax when it is due.

The IRS may also assess corporate tax obligations against those individuals considered to have been responsible and willful in failing to pay taxes. The method for assessing individuals with corporate tax responsibility is through the Trust Fund Recovery Penalty. Furthermore, if the IRS determines that the failure to satisfy federal payroll tax obligations was intentional, it may seek criminal prosecution, close down the business, or liquidate the business’s assets.

CONTACT AN EXPERIENCED TAX ATTORNEY

Norman D. McKellar has extensive experience in dealing with the Internal Revenue Service, defending businesses and individuals against forcible collection action, and negotiating with the IRS. For a FREE CONSULTATION to discuss your case and available options, please contact Mr. McKellar at 865-566-0125.

Contact An Experienced Tax Attorney

Lead attorney Norman D. McKellar has extensive experience in tax law, dealing with the IRS, defending businesses and individuals against forcible collection action, and negotiating with the IRS. He has the experience you need to manage your tax-related matter correctly.

To schedule a free initial telephone consultation, call 865-566-0125 or send us an email. Appointments are available at any of our three offices: Knoxville, Tennessee; Nashville, Tennessee; and Atlanta, Georgia. We accept credit cards.