The Danger Involved in Failing to Remit Withheld Taxes
All business owners are required to withhold taxes from their employees’ paychecks. This money is then remitted to the federal government as well as state and local governments when applicable. When a business owner fails to give the government the withheld money within the allowed time frame, either by accident or on purpose, there are serious consequences.
What Taxes Should Businesses Withhold?
In most cases, American businesses must withhold federal taxes as well as Medicare and Social Security taxes. These are paid to the IRS either every two weeks or every month along with reports. If you have any questions about federal withholding, consult IRS Circular A.
If you live in a state or in an area with local income taxes, you also must withhold these taxes from your employees’ paychecks. The ways of paying and documenting these withholdings vary with the jurisdiction. The penalties for failing to remit these withholdings will vary, but the federal penalties are clear.
IRS Late Penalty
Regardless of the reason you are late in remitting withholdings, the IRS will charge a penalty. This penalty depends on how late you were. If you were one to five days late, it will be two percent of the money due. If you were six to fifteen days late, it is five percent. At sixteen days, the penalty increases to ten percent. You will be charged this penalty even if you outsource your payroll to a third party and they are responsible for the tardiness.
The 100 Percent Penalty
In addition to the late penalties imposed on the business, the person responsible for failing to withhold and remit taxes may be held responsible. This can be the business owner, a company officer, or anyone who can sign on the payroll account. If this person fails to withhold and/or remit taxes, they can be charged a penalty that is equal to the amount that the IRS should have received. This penalty is covered in the IRS’s Section 6672.
Criminal and Civil Penalties
If you are responsible for withholding taxes and fail to pay this to the appropriate agencies, you likely have committed a crime. You could potentially face both civil and criminal actions for this. In the eyes of the law, failing to remit withholdings or even temporarily borrowing from them is theft and fraud.
Few people fail to remit withheld taxes and get away with it. Your employees, for example, will notice at tax time that the numbers fail to add up and communicate with the IRS to resolve what they assume is a simple mistake. The IRS aggressively investigates all potential cases of failure to withhold or remit employee taxes, so few employers get away with it. Businesses suspected of failure to remit withheld taxes will be subject to audit, and then fined and possibly imprisoned if found guilty. In addition, the employee may file civil charges.
Local and State Penalties
In addition to the severe federal penalties already listed, you can face a multitude of state and local penalties for failing to remit withheld taxes. Combined with the federal penalties, you will likely be paying several times the amount that you failed to remit. Although it may be tempting to borrow from employee withholdings temporarily, this is illegal and may cause consequences that destroy your business.
No Escape from the IRS
We have all heard the saying that nothing is certain but death and taxes. While medical science now allows us to delay death in many cases, there is no escape from the Internal Revenue Service. If you fail to remit withheld taxes and do not immediately rectify the situation and pay the fines, the IRS is likely to investigate and audit your business. In addition, the IRS can attach your future withholdings and place liens on all property owned by your business and you personally.
While handling payroll taxes can be quite a chore, it is important to make this a priority and also to maintain good oversight of any employees who are involved in the process. While it may be tempting for a struggling business to ‘borrow’ against withholdings, the steep penalties and fees are simply not worth the risk. The IRS is especially strict about this issue, so it is best to always stay on the right side of the law.
The bottom line is, tax penalties are nothing to play with. As a tax preparer, you’ve got to impart this information to your clients clearly and effectively. If you’ve got strategies to help them take care of these situations creatively, then offer them with both the pros and cons of your ideas.
During this tax season, you may want to consider streamlining your tax business so as to have the time to be more of an advisor to clients, instead of doing the grunt work of tax filings. One simple way to free up countless hours to engage your clients and advise them is to efile 1099 and W-2 forms instead of filing paper documents. One step further is to find a service that will handle the printing and delivery of the recipient tax forms for your clients filings. Probably the best known provider that allows you to file 1099 online, as well as doing the delivery of printed forms is eFile4Biz.com.
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