The Importance of Payroll Taxes
Episode 35: In this episode, Timalyn focuses on the importance of payroll taxes. Paying employee taxes is a cost of doing business. If you have classified actual employees as independent contractors, you are guilty of tax evasion. The penalties are severe.
The IRS Test to Determine Classification
Properly classifying people who work for you is an important responsibility. The IRS has an online test to help you determine whether an individual should be classified as an employee or as an independent contractor or some other valid classification.
If you are an employee working as an independent contractor (often for cash), why would the employer do this? They aren’t looking out for you. They’re looking out for themselves, avoiding to pay employee taxes. This is tax evasion.
What Are Payroll Taxes?
Timalyn explains that at the federal level, payroll taxes are comprised of 3 different taxes:
● Federal Income Tax – your tax withholdings based on how your completed your W-4.
● FICA Taxes – social security and Medicare taxes.
● FUTA – an annual tax paid by employers called the Federal Unemployment Tax Act. It’s paid on the first $7,000 of earning for each employee.
Timalyn explains that if the IRS finds you guilty of tax evasion via misclassification, you’ll be assessed significant fines and penalties over and above the actual taxes you neglected to pay.
Annual Payments, Quarterly Payments and Tax Deposits
Payroll taxes can be complicated. The FICA tax the business withholds is usually 7.65% of the employees’ wages. There’s also the obligation for the business to pay another 7.65% of the wages.
On an annual basis, employers are required to send out IRS W-2 Forms by January 31st. You may also be required to complete the IRS W-3 Form, which is a reconciliation of all of the employee W-2 Statements. You’ll also file IRS Form 940, for the federal unemployment tax to be paid by the employee.
On a quarterly basis, employers will file the IRS Form 941, which is for the employer’s quarterly federal tax return. This reports the income tax and FICA tax withheld for each employee. It also shows the FICA taxes paid by the employer (that other 7.65%).
Employees have taxes withheld during the year, on an on-going basis. These withholdings are considered deposits, which will be used to offset your end-of-year tax liability. Timalyn explains that once your payroll tax liability reaches a certain level, you need to understand your deposit schedule for the withheld taxes.
If your quarterly deposits are less than $2,500, you can send a payment with the Form 941, without getting penalized. It can be either e-filed or mailed. The payment itself can be sent electronically via the EFTPS or a check can be mailed. If you use the e-file option and the EFTPS, there’s an advantage of having an electronic stamp showing when you completed these actions.
If your quarterly deposits are higher than $2,500, you need to make the payment by the 15th of the following month. So, if you are submitting this monthly, your April deposits would need to be sent in by May 15th and so forth.
Timalyn notes that there’s a threshold that would require you to make deposits semi-weekly deposits. So, in this case, a company’s payroll deposits of any payroll taxes withheld would need to be made within 3 days of having run the payroll.
If You Fail to Meet Your Obligations
As Timalyn mentioned at the outset, there are severe penalties if you fail to meet your payroll tax obligations. The IRS can assess civil penalties including:
● Failure to Deposit
● Trust Fund Recovery Penalties (one of the biggest tax penalties)
o It can be up to 100% of the tax owed
o A $15,000 deposit that wasn’t made, could be assessed another $15,000 penalty
▪ Plus, the original $15,000, the Failure to File and Failure to Deposit penalties
You have to keep up with your payroll tax obligations. If you let them get away from you, they can potentially drive you out of business.
The IRS can also file criminal charges including imprisonment and fines. It’s considered a felony to willfully not collect or truthfully account for the tax. This is why making sure you’re using the proper classification of anyone working for you. You can be put in prison for up to 5 years and be fined up to $10,000.
If you are a business owner and you know you have a payroll tax issue, consider booking a consultation with Timalyn, via here Bowens Tax Solutions website. Click this link to sign-up for your paid consultation.
Additional Resources
The upcoming Episode 36 will focus on the Trust Fund Recovery Penalty. Be sure to listen in 2 weeks.
If you are a tax professional, the Tax Pro Representation Journey will launch on Sept 18, 2023. This is a group with a private podcast and article subscription for tax pros interested in representing taxpayers facing back tax issues. This will include weekly tips to help you grow this area of your business.
Please consider sharing this episode with your friends and family. There are many people dealing with tax issues, and you may not know about it. This information might be helpful to someone who really needs it. After all, back taxes shouldn’t ruin their life either.
As we conclude Episode 35, we encourage you to connect with Timalyn on social media. You’ll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.
Remember, Timalyn Bowens is America’s Favorite EA and she’s here to fill the tax literacy gap, one taxpayer at a time. Thanks for listening to today’s episode.
For more information about tax relief options, visit https://www.Bowenstaxsolutions.com/ .
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Disclaimer: This podcast is for informational and educational purposes only. It provides a framework and possible solutions for solving your tax problems, but it is not legally binding. Please consult your tax professional regarding your specific tax situation.
