4 Critical Things Every New Employer Should Know About IRS Payroll Tax Rules

Unpaid taxes of any type (income tax, property tax, excise tax…) can be stressful, but if you fall behind on payroll taxes, you’re entering the “big leagues” of tax problems. The price you pay for not paying payroll taxes is severe: you can lose your business, and in some cases, your freedom.

The “big leagues” of IRS problems, because…

  • The IRS equates unpaid payroll taxes with stealing from your employees! The IRS acts fast enough when they think you have their money. And they act twice as fast when they they think you have withheld other taxpayers money and failed to deposit it with Uncle Sam.
  • Payroll tax penalties are especially severe. Worse yet, you can become personally liable for a businesses past-due payroll taxes (the “trust fund” penalty) if you are responsible in any way for collecting and accounting for employment taxes and willfully fail to deposit them with the US Treasury.
It’s easy for start-up business owners be so focused on growing their business, and getting customer projects done that will get them paid, that they fail to pay attention to IRS record-keeping rules, paperwork to process, and forms to file.
An Unfortunate, but not Unusual Personal Story
Take Jay, for example. I’m currently working with him and his wife to resolve a truly “big league” IRS problem. He opened a trucking business in 2006; cash flow was tight in the early-going. There were times he could barely meet payroll, much less meet tax deadlines. He paid his vendors and paid his employees first; he paid himself and the IRS last. In fact, he frequently failed to pay his payroll taxes altogether.
Today, his business is closed, he’s filed for bankruptcy, he lost his home, yet he still owes the IRS over $300,000 in back taxes. Over a third of that total is interest and penalties. Many business owners can’t ever imagine falling into such a huge tax debt. But six-figure payroll tax debt is very typical in the cases I see.  It starts small, then steamrolls quickly.
Here’s 4 things you want to be sure you pay attention to when it comes to IRS payroll tax rules:
  1. Deposit deadlines. Know and adhere to the IRS deposit deadlines that apply to your business. The frequency of deposits (quarterly… monthly… semi-weekly?) is determined by the size and frequency of your pay-dates. It’s all outlined in Circular E. http://www.irs.gov/pub/irs-pdf/p15.pdf  Get clear on these deadlines, or get a payroll service who can stear you clear of IRS problems.
  2. Forms to file. In addition to deposit deadlines, you must meet the filing deadlines within which you must sign and mail the proper paperwork. Many small business owners pay their taxes electronically and then think they’ve met all the IRS requirements. Not so fast, my friend. Make sure you also complete, sign, and file the proper Forms 941, 940, W-2, W-3, etc., and mail to the appropriate IRS office on time.
  3. The severity of late payment penalties. Miss a deadline by just one day, and it will cost you dearly. There are three major penalties you can be hit with (failure to file, failure to deposit, and the failure to pay), which can add up to about 33% plus interest if you don’t pay in just 16 days after you have filed the 941 (Payroll Tax Return) past the due date!
  4. Using the money you collect from employees’ payroll taxes to pay your vendors or other operating expenses is sheer folly. Many startups reason to themselves that they’ll pay the IRS next week while they pay others this week, and that way they can generate more revenue and cash flow to pay all their bills. Then next week comes and they repeat the process.
ANCHOR ON THIS: If you’re a startup, or have just hired your first employees, I hope this information helps steer you clear of future IRS problems.  On the other hand, If you owe payroll taxes, you need to get expert professional help before it’s too late. Representing yourself before the IRS would be like going to court without a lawyer. And you do not want to take any chances when dealing with the IRS!


Posted in Small Business Success Blog.

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