Do you pay your payroll taxes on time? In this article, we’ll define what payroll taxes are, what it means when they are unpaid, and the penalties for not paying payroll taxes on time.
What are Unpaid Payroll Taxes?
Payroll taxes are the federal and state taxes that an employer deducts from employees’ wages. They are a subset of employment taxes that employers pay.
When payroll taxes are “unpaid,” it means the employer neglects to pay them to the relevant tax authorities.
Types of Payroll Taxes
Employers need to pay many types of payroll taxes on behalf of their employees, including:
- Federal Income Tax Withholding: Employers have a legal obligation to subtract federal income taxes from employees’ wages, which is determined by their W-4 forms and the IRS tax tables.
- Social Security and Medicare (FICA) Taxes: Employers have the obligation to subtract Social Security and Medicare taxes from employees’ wages, along with making a matching contribution on behalf of their employees.
- State Income Tax Withholding: In states that have income tax, it is the duty of employers to subtract state income taxes from their employees’ earnings and submit them to the state tax authority.
What about FUTA?
Related to payroll taxes is another type of employment tax – Federal Unemployment Tax (FUTA). Employers are required by law to contribute towards federal unemployment taxes, ensuring the availability of financial support for eligible workers during periods of unemployment. However, FUTA is not considered a payroll tax because it is not paid by employees nor is it deducted from their wages.
Penalties for Unpaid Payroll Taxes
Employers may face severe penalties and repercussions if they fail to pay their payroll taxes. The following consequences are associated with non-payment:
- Failure to Deposit Penalty: Employers who do not meet the deadline for depositing payroll taxes can incur fines that correspond to a percentage of the outstanding tax sum. The penalty rate rises in proportion to the duration of the delay.
- Interest Charges: Over time, the amount owed to the tax authorities increases as unpaid payroll taxes accumulate interest.
- Trust Fund Recovery Penalty (TFRP): In the event that an employer intentionally neglects to submit payroll taxes, the IRS reserves the right to impose a TFRP on accountable individuals within the organization, such as executives or board members. This fine has the potential to reach 100% of the outstanding tax amount.
- Civil and Criminal Penalties: Noncompliant employers who intentionally or fraudulently avoid paying payroll taxes may be liable for both civil and criminal repercussions, such as fines and imprisonment.
- Liens and Levies: To collect unpaid payroll taxes, tax authorities have the power to either place liens on the employer’s assets or seize funds from bank accounts.
- Loss of Business Reputation: Unresolved problems regarding unpaid payroll taxes have the potential to harm a company’s image and hinder its ability to recruit and retain staff.
- Ineligibility for Government Contracts: The failure of businesses to settle their payroll taxes can result in their disqualification from government contracts.
Take Action
As an employer, you need to understand and fulfill your payroll tax obligations. If you find yourself facing unpaid payroll tax issues, it’s crucial to take immediate action to address the situation and seek professional guidance to avoid escalating penalties, such as seeking advice from a certified public accountant or tax attorney with expertise in payroll taxes.
eFile360 can help you during tax time, too. As an IRS-authorized e-file provider, we can help you file 1099, 1098, W‑2, and Affordable Care Act forms. Get started today by signing up for a free account.