One of the most crucial parts of payroll in a small company is remitting taxes on time. Often, when considering the importance of payroll, withholding comes to mind. Especially this year, as the IRS has released new tables under the Tax Cuts and Jobs Act. However, if taxes are not remitted to the federal government on schedule, harsh personal penalties can be incurred.
Payroll tax penalties are crucial to avoid because you could be held personally responsible for them, even in a business entity that would normally shield owners, such as a corporation or limited liability company.
Federal income and employment taxes (such as social security) as well as state and local taxes must be withheld by employers from their employee’s wages. Once taxes are withheld, they must be remitted to the federal government according to a deposit schedule.
If the deposit schedule is not adhered to, escalating penalties will apply. If these penalties are not paid, the Trust Fund Recovery Penalty could apply.
The Trust Fund Recovery Penalty is also known as the 100% penalty. The 100% penalty allows the IRS to assess the entire unpaid amount against a “responsible person.”
A responsible person is someone who:
- Is responsible for collecting, accounting for and remitting withheld federal taxes
- Willfully fails to remit those taxes. Intentionally, deliberately, voluntarily and knowingly disregards the requirements of the law.
A responsible person can include a shareholder, owner, director, officer or employee. Occasionally, it can be assessed against a third party. More than one person can be assessed as a responsible person by the IRS.
The IRS can file a lien or take levy or seizure actions against the assets of an individual who is a “responsible person,” without the corporate veil generally given to corporations or limited liability companies.
The best way to avoid the 100% penalty is to prevent tax remissions from ever being late. Ensure that employees taxes are properly withheld and are being remitted to the federal government on time. You should also check that state and local requirements are being met.
Using a payroll service might be a good idea. If you aren’t using one currently, consider hiring one. Using a good payroll service removes the burden of you withholding the proper amounts, taking care of tax payments, and handling record keeping.
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