Unpaid IRS payroll taxes can be a big problem for business owners who are responsible for withholding and depositing payroll taxes. Payroll taxes can add up quickly and are a substantial part of a business's cash flow. In times of financial stress or rapid growth, businesses may overlook or fail to remit payroll taxes that can be substantial. Consult a payroll tax attorney to see if you qualify for payroll tax relief.
What Is Payroll Tax?
Payroll taxes include employee income taxes, social security taxes, unemployment taxes, and state and local income taxes. These taxes are a large percentage of a businesses taxes and must be withheld on a timely basis to avoid substantial penalties and interest. Business owners and executives may be liable for unpaid payroll taxes if the business fails to withhold the taxes.
How to Calculate Payroll Tax?
Employers use Form W-4 to determine an employee's federal income tax withholding and calculate social security and medicare tax using Form 941. Form 940 is used to calculate and remit federal unemployment insurance tax. Employers may use the state equivalent of the Form W-4 to determine the correct amount of state income tax to withhold for employees.
Report Payroll Tax on IRS Form 940 and IRS Form 941
Taxpayers must calculate and report payroll taxes on IRS Form 940 and IRS Form 941. These forms must be timely filed to avoid substantial penalties.
IRS Form 940 reports the Federal Unemployment Tax Act (FUTA) amount. FUTA also may take into account state unemployment taxes paid as a credit to reduce the balance due.
IRS Form 941 is the Employer's Quarterly Federal Tax Return. Depending on the amount of tax withholding, the balance to withhold may be due quarterly, monthly or weekly. Businesses should not ignore Form 941 because penalties for underpayment and estimated tax penalties can be substantial.
Information for Payroll Tax Penalties
The IRS monitors payroll taxes closely because these taxes are withheld and deposited on the employees' behalf. Failure to collect these taxes from employers and any payroll tax debt generally results in great difficulty for the IRS to collect the payroll taxes from anyone. Due to this challenge, the IRS uses strong enforcement tactics to collect from the business owner and managers responsible for depositing these taxes with the U.S. Treasury.
Failure by the managers or executives of the business to withhold and pay the taxes can result in additional penalties and even criminal liability for a willful failure. The IRS also has the ability to assess a Trust Fund Recovery Penalty (TFRP) against persons it deems responsible for the failure to withhold taxes.
What is the Trust Fund Recovery Penalty?
The TFRP is a very powerful tool because it is very difficult for taxpayers to avoid and once assessed cannot be eliminated, even in bankruptcy, without negotiating with the IRS. The TFRP is equal to the tax that should have been deposited with the IRS, essentially swapping the unpaid employment taxes for a penalty tax equivalent that cannot be reduced without negotiating with the IRS. The TFRP cannot be discharged in bankruptcy proceedings for Chapter 13 or Chapter 7 bankruptcy.
The Trust Fund Recovery Penalty may be paid in an installment agreement or payment plan, or may be included in an offer in compromise. For individual taxpayers facing a TFRP, careful analysis should be performed to determine the maximum penalty and if it can be reduced. If a taxpayer cannot legally avoid payment of the TFRP, then the most efficient method of repayment should be reviewed.
Contact a Payroll Tax Attorney to Discuss Your Options
Taxpayers who receive an assessment letter from the IRS should contact Payroll Tax Attorney Andrew Steiger at Steiger Tax Law to discuss payroll tax relief or payment options for unpaid payroll taxes and help navigate the process to avoid an IRS criminal investigation. Read an additional blog post here on payroll tax penalties.