Payroll Errors & IRS Penalties
The Internal Revenue Service is responsible for enforcing the federal payroll tax laws. As an employer, you are responsible for withholding federal income tax, and Social Security and Medicare--FICA--taxes from your employees' wages. You must also report and pay employees' and your own portion of taxes to the IRS. Failure to comply with IRS payroll rules can result in penalties.
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Instructions
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Report FICA and federal income tax liabilities quarterly via Form 941 or annually via Form 944 to the IRS. You can incur a 5 percent failure-to-file penalty for the entire month or part of a month that the return is not filed, even if you obtained an extension to delay your filing deadline. The maximum penalty is typically 25 percent of the entire tax due. For each month or part of a month that the return is paid late, the IRS charges a .5 percent failure-to-pay penalty of the tax due. In addition, the IRS charges interest on the unpaid tax. Interest starts accruing from the due date of the unpaid balance.
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Make deposit payments according to the schedule the IRS dictates. Employers are typically required to make deposits monthly or twice per week (semi-weekly). If you file your tax return quarterly via Form 941, you may be able to make the payment with your tax return without incurring a penalty. For example, if your tax liability for the present or previous quarter is less than $2,500 and if you did not have a $100,000 next-day deposit obligation for the present quarter, you can make the payment with your tax return.
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Avoid penalties due to untimely deposits. You can incur the following penalties in such cases: 2 percent for deposits one to five days late; 5 percent for deposits six to 15 days late, and 10 percent for deposits 16 or more days late.
If you make your payment at an unauthorized financial institution, pay it directly to the IRS, or fail to use the electronic deposit system as required, you can incur a 10 percent penalty of the tax due. A 15 percent penalty applies to payments that remain unpaid more than 10 days after the date of the initial bill that the IRS sent, or on the day you received the bill, whichever is sooner.
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Send employees their annual W2s showing wages paid and taxes withheld for the year, by the deadline--typically by the end of January each year. You are also required to file the W2 with the Social Security Administration by the last day of February, and if filing electronically, by the last day of March. You are responsible for ensuring W2s are filed accurately and on time. If you neglect to file an accurate W2 by the deadline, penalties may apply. The penalties depend on when you file a correct W2. For example, the penalty is $50 per W2 if you file correctly more than 30 days after the due date but before Aug. 11.
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Tips & Warnings
Consult the IRS Circular E (Employer's Tax Guide) or contact the IRS directly for your reporting and payment schedule to ensure compliance.
References
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
