Focus on Payroll Taxes

Focus on Payroll Taxes

Focus on Payroll Taxes

Payroll Services

Focus on Payroll Taxes

Payroll taxes, also called employment taxes, are those taxes that employers are required to pay

based on the compensation of their employees. They include federal and state income taxes

withheld from employee paychecks, FICA (Social Security and Medicare) taxes and FUTA

(federal unemployment) taxes. Because they include money that actually belongs to the

employee and is being held in trust by the employer, the IRS places a high priority on the

accurate and timely payment of these taxes. In addition to assessing steep penalties for

delinquent payroll tax payments, the collection process for payroll tax debt is accelerated in

comparison to the collection of other types of tax debt and tax settlement agreements are

more difficult to obtain.

What are the consequences of a payroll tax debt?

 Penalties and Interest

Interest is charged on an outstanding payroll tax balance at a rate of 3% plus the federal

short-term interest rate. In addition, failure-to-file and failure-to-pay penalties are

assessed at the rates of 4.5% and 0.5% respectively for each month or partial month

that a payroll tax return is not submitted and a back payroll tax balance goes unpaid.

These penalties can accumulate up to a maximum of 47.5% (22.5% for failure-to-file and

25% for failure-to-pay) of the unpaid payroll tax balance.

 Trust Fund Recovery Penalty

In addition to the ordinary penalties and interest assessed on any back tax balance, the

IRS imposes an extra penalty, called the Trust Fund Recovery Penalty, when a business

falls behind on its payroll tax payments. This additional penalty, which is equal to 100%

of the tax balance owed, can ultimately be collected from anyone who has knowledge of

the unpaid taxes or control over the disbursement of corporate funds even though they may not

have the final decision making power. The penalty is announced by an official IRS Notice which is

followed by a Notice and Demand for Payment if the recipient of the notice does not respond

within 60 days.

 Aggressive Collection Activity

When payroll taxes remain unpaid, the IRS can place liens on business property and/or

bank accounts to cover the amount of any outstanding balance. They can also seize the

personal assets of any person who is in any way responsible for the payment of these

taxes including garnishing their wages and payments made to retirement accounts. In

extreme cases, an individual can be criminally prosecuted if they are found guilty of

intentionally failing to file payroll tax returns.

What steps should be taken to resolve a payroll tax debt?

 Make all current payroll tax deposits and tax filings.

This prevents the further accumulation of the tax debt and makes the business eligible

to seek a payroll tax settlement agreement. The IRS will not enter into negotiations to

resolve a payroll tax debt until the business in question becomes compliant with its

current payroll tax obligations.

 File all past due payroll tax returns.

File past due payroll tax returns even if sufficient funds are not available to pay the

balance of back payroll taxes due. This includes all Form 940 (Employer’s Annual Federal

Unemployment Tax Return) and Form 941 (Employer’s Quarterly Federal Tax Return). The

filing of these returns will halt the accumulation of failure-to-file penalties although interest and

failure to pay penalties will continue to be assessed on any back payroll tax balance.

 Complete business financial information statements.

Complete comprehensive financial statements which include information such as

business ownership, assets, income and expenses. Such statements, which are a

prerequisite to applying for a payroll tax settlement option with the IRS, include Form

433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) for

sole proprietorships and Form 433-B (Collection Information Statement for Businesses) for

all other business structures.

 Contact a tax settlement professional.

Contact a tax settlement professional who specializes in business tax debt resolution.

These individuals will be familiar with the tax settlement options available for resolving

an outstanding payroll tax balance and will be able to select the best tax resolution

option available for a given set of financial circumstances. They also have experience

that will serve them well in negotiating successfully with the IRS on behalf of the client.

Although tax settlement agreements for delinquent payroll tax payments are difficult to

obtain, they are, nevertheless, possible.

If your business is seeking an outsourced bookkeeping solution, the experienced professionals at

Orange County Bookkeeping can provide you with the expertise you are looking for. Our

licensed accountants and bookkeepers are equipped to serve Orange County businesses of

any size, structure or industry focus. Visit us today at to learn

more about our full range of bookkeeping, tax and business consulting services. Contact us

by phone at (949) 242-9852 at or by email at to receive a free,

no obligation consultation.

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