Small Business Owners: Avoid these payroll tax pitfalls

by: Yvonne Chmielewski

If you are a business owner, you have payroll taxes. As the Internal Revenue Service has intensified its payroll tax compliance program focusing on small businesses, it is not wise to take this responsibility lightly.

What taxes should you pay? Every employer must account for federal income tax, federal and state unemployment tax, social security, and Medicare. There also may be additional taxes depending in what state you operate. We cannot overstress the importance of accurately calculating, reporting and depositing these monies from your employees’ paychecks.

Here are the top pitfalls of employer payroll taxes:

  • Incorrectly paying unemployment taxes
  • Borrowing monies withheld from employees’ paychecks to cover cash flow
  • Making late deposits
  • Incorrectly classifying employees as independent contractors (1099’s)
  • Confusing depositing with reporting

Why are we mentioning these common pitfalls? The answer is simple. Because the consequences can be severe and could lead to high penalties and possible jail time:

Payroll tax penalties can add up quickly and generate potentially huge tax liabilities. The penalties that can be assessed on delinquent payroll tax deposits or filings can dramatically increase a small business’ payroll tax bill. Whether the small business is operated as a sole proprietorship, corporation, S-corporation or LLC, the tax penalties assessed can cause a business owner to lose his/her business. There are three major penalties that can be assessed–failure to file, failure to deposit and failure to pay.

The IRS pursues you for payroll taxes owed. In addition to the penalties above, the IRS can access the Trust Fund Recovery Penalty (TFRP) that can hold a responsible person accountable for 100% of the unpaid trust fund taxes. A person is liable for the TFRP if two statutory requirements are met: (1) the person is “responsible” — had the duty to account for, collect, and pay over the trust fund taxes to the government; and (2) the person “willfully” failed to collect or pay over trust fund taxes to the government. The IRS is able to “pierce” the corporate veil and pursue individual shareholders (even corporate officers) provided those individuals meet the requirements to be assessed the TFRP.

You could lose your business. As mentioned above, you have to remember that as an employer you are withholding taxes from your employees and that you are entrusted to pay those taxes to the IRS on behalf of those employees. The IRS takes a business owner’s trust obligation very seriously. The IRS has the power to padlock your doors. They have the further power to seize your inventory, machinery and equipment. They can also seize your funds and bank accounts through their levying authority. As a business owner, you should react immediately to any notices concerning your payroll taxes. Failure to do so can cost you your business.

Not filing or paying can be considered a federal crime. If the IRS cannot satisfy a small business’ payroll tax debt through its ordinary methods, it has the power to refer a business owner’s case to the Criminal Investigation Division and then on to the Department of Justice if it can be proven that there was intent not to file or pay the payroll taxes.

How can you avoid these pitfalls and make sure you are withholding the correct amounts? Work with a payroll company who knows the guidelines and regulations. GreenSmart Payroll Solutions, an affiliated company backed by Hobe and Lucas, offers customized and flexible payroll services combining all the capabilities of national payroll firms, but backed by a certified professional accounting firm you trust. Trust us to handle your tax payments, withholding and filings accurately and on time while providing the reporting you need to run your business.

Don’t wait until 2016, give us a call at 216.524.8900 to discuss your individual situation or fill out our contact form.