Unpaid Payroll Tax Penalties and Fines for Businesses

By hrlineup | 30.01.2020

Employers have a key responsibility when it comes to payroll tax. They need to withhold these taxes when paying the employee and pay these taxes on their behalf. Furthermore, all payroll taxes need to be reported by the employer. Failing to report, collect and remit, whether intentionally or unintentionally, will result in a penalty for unpaid payroll taxes.

The different payroll taxes that an employer needs to take note of include: –

  • Federal, state and local income taxes
  • Federal and state unemployment taxes
  • Medicare taxes and Social Security

Failure to File Penalties

When there are unpaid payroll taxes, there are different penalties the employer will face which may include: –

  1. If the payment is between 1-5 days late, the penalty from the IRS will be at 2% of the amount paid.
  2. The longer one does not pay, the higher the penalty becomes. For example, from the IRS, between 6-15 days, the penalty is 5%, 15+ days and the penalty is 10%.
  3. A warning through a bill from the will then be sent following 16 days. This is where things begin to become critical. If one takes more than 10 days to pay after receiving the bill, the penalty will be at 15%.

The penalty for not paying employee taxes as mentioned above is just the beginning. If the bill remains unpaid, then the penalty begins to earn interest adding up to 6% on the amount that is owed. When sharing the bill, it will be indicated the time when pay is expected. After this time, a tax lien may be filed, so that the IRS can settled their claim against their property. In the worst-case scenario, one may be charged and receive jail time.

Trust Fund Recovery Penalty

Since the payroll taxes are held on behalf of the employees, they are also known as trust fund taxes. The largest payroll late payment penalties are what the employer will face if they fail to withhold federal employment taxes. This can be viewed as a felony, and the result may be 100% penalty of the taxes that are owed. In the toughest cases, the penalty will be imprisonment of up to five years. The reason that this penalty is so severe is because it is viewed as willful failure to pay the tax.

How to Avoid These Penalties

To ensure that the business does not need to face these penalties, the human resource department should ensure the following: –

  • Make use of a payroll software. This will easily calculate all the pending taxes, saving time and ensuring accuracy.
  • All required taxes have been withheld every time that the payroll is done.
  • Separating the withheld taxes from the business expenses or general accounts. These should be in a separate account to prevent them being used to pay for business expenses.

It is essential for employers to have an individual or a team within the company responsible for keeping track of the taxes. There are penalties imposed for filing the wrong information or making mistakes when filing. With taxes, it is essential to get it right the first time.