Blog
How to Handle Payroll Tax Problems with the IRS
How to Handle Payroll Tax Problems with the IRS
Dealing with payroll tax issues can be super stressful. The IRS doesn’t mess around when it comes to collecting payroll taxes, so it’s important to address any problems quickly and properly. This article will walk you through some common payroll tax problems and give tips on how to handle them.
What are Payroll Taxes?
First, let’s review what payroll taxes are. Payroll taxes are taxes that employers are required to withhold from employees’ wages and pay to federal and state governments. These include:
- Federal income tax
- Social Security tax
- Medicare tax
- Federal unemployment tax (FUTA)
- State income tax
- State disability insurance tax
So payroll taxes are the government’s cut of employees’ wages to fund programs like Social Security and Medicare. As an employer, you are responsible for properly calculating, reporting, and paying these taxes in a timely manner.
Penalties for Payroll Tax Problems
Now let’s review some of the penalties the IRS and state tax agencies can impose if you don’t properly address payroll tax issues:
- Failure to pay – Up to 5% per month on the unpaid amount
- Failure to deposit – Up to 15% on the un-deposited amount
- Failure to file – 5% per month on the unpaid taxes up to 25% max
- Failure to furnish W-2s – $50 per W-2 up to $100,000 max
- Failure to properly withhold – 1.5% of the under-withheld amount
- Interest charges – Compound interest on unpaid amounts
It’s imperative to fix payroll tax problems to avoid these substantial penalties and interest charges that keep accumulating until you pay what you owe.
Payroll Tax Resolution Options
If you’re dealing with serious payroll tax issues, you may need to consider more aggressive tax debt resolution options such as:
Tax debt relief companies
Reputable tax relief firms employ experienced tax attorneys and enrolled agents to negotiate settlements and payment plans with the IRS on your behalf. They charge a percentage of the tax debt as their fee.
Offer in compromise
This allows you to settle your tax debt for less than you owe by demonstrating you don’t have the means to fully pay it back. Strict eligibility requirements apply.
Currently not collectible status
The IRS may accept that your financial situation currently does not allow you to make payments and place your account in a temporarily non-collectible status.
Bankruptcy
Declaring bankruptcy stops IRS collection efforts and can eliminate some types of taxes, but has major long-term financial consequences.
Tips for Preventing Payroll Tax Problems
They say that an ounce of prevention is worth a pound of cure. Here are some tips to avoid payroll tax problems in the first place:
- Use payroll software to calculate taxes automatically.
- Hire a payroll service to handle tax filings and payments.
- Consult a tax pro if you’re unsure how to classify workers.
- Set reminders for tax deadlines to avoid late filings/payments.
- File forms electronically – it’s faster and has built-in error checking.
- Review payroll tax returns carefully before submitting to catch mistakes.
- Reconcile payroll accounts frequently for accuracy.
- Educate yourself on the latest payroll tax laws and rates.
- Have a CPA/EA review your payroll tax compliance annually.