Focus on Payroll Taxes
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.
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