What Happens When You Are Late Paying Your Payroll Taxes?
The United States government imposes two major payroll taxes: Old-Age, Survivors and Disability Insurance (OASDI,) commonly referred to as Social Security, and Hospital Insurance, which supports current Medicare benefits paid out to today's senior citizens. Employers must withhold the employee's share of these taxes and forward them, together with the employer share of the tax, to the IRS on a regular basis. The penalties for failing or refusing to do so are among the most severe penalties in the tax code.
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Tax Rates
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The OASDI tax, which funds current Social Security benefits being paid to seniors, widows, orphans and the disabled, is set at 6.2 percent of the first $106,800 in compensation for employers, and 4.2 percent for the first $106,800 for employees as of 2011. The employee share was temporarily reduced from 6.2 percent as a result of a law passed at the end of 2010. The Hospital Insurance tax is 1.45 percent for the employer and 1.45 percent for the employee, with no income cap.
Withholding and Reporting Procedure
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If you have any employees from whom you withhold income tax, Social Security or Medicare tax, you must file an IRS Form 941, Employer's Quarterly Federal Income Tax Return every quarter. This form accounts for all funds you have paid employees, how much you have withheld, and helps you calculate your required Social Security and Medicare taxes. Larger firms must file and submit taxes on a monthly basis. Typically, employers use the electronic funds transfer functionality to transfer funds to the IRS.
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Penalties for Failing To Withhold, File or Pay
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The IRS imposes a 5 percent tax on the amount of tax due for each month a Form 941 is late. The maximum penalty is 25 percent of the tax due, unless there is evidence of fraud. The failure to pay tax penalty is 0.5 percent of the amount due per month. The penalty for individual payers is reduced to 0.25 percent per month, provided the IRS has agreed to receiving payments in installments.
Collection Actions
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If your failure to file or pay your payroll taxes is prolonged, the IRS can pursue civil and criminal remedies against you, up to and including the seizure of your business assets and even your personal residence. They can shut down your business without first obtaining a court order. The courts have disallowed the use of limited liability entities, such as corporations and LLCs, to shield the personal assets of management against claims involving a failure to pay payroll taxes. The IRS can "pierce the corporate veil," disallow the usual limited liability protections that apply to ordinary creditors, and seize your personal assets.
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