The 4 Most Common Payroll Tax Problems

Many small-business owners will encounter a payroll tax problem at some time or another. Although the Internal Revenue Service (IRS) takes all federal tax problems seriously, they can be even more demanding and aggressive when it comes to payroll taxes. So, here is a list of the most common tax problems payroll tax problems small-business owner’s encounter.

Failure to Withhold and Pay Federal Taxes

All employers in the United States are required to withhold federal income tax, Social Security and Medicare taxes from employee wages or salaries. Failure to do so will often lead to the IRS requiring the business owner to pay taxes on income paid to employees as well as hefty fines and penalties. If you withhold federal taxes, and then fail to pay them to the IRS, you may be held current criminally liable and face prosecution or even jail time.

Late Payroll Tax Deposits and Payments

The IRS will charge you fines and penalties if you make your payroll tax deposits and payments late. In most cases, they rest will charge 0.5% of the tax amount due every month, and may also assess a 25% penalty for tax deposits that are made considerably late. So, in order to avoid costly fines and penalties, always make sure that your tax deposits are made on the 15th day of the month when taxes were withheld from employee paychecks.

Failure to Issue IRS Form 1099

Failure to issue IRS Form 1099 is another common problem for employers that use outside companies or subcontractors to perform work for their business. If you pay an outside business or individual $600 or more in any calendar year, you are required to issue an IRS Form 1099 to that business or person and forward copies of the 1099 to the Internal Revenue Service. Failure to do so will result in a $75 penalty for each 1099 that was not issued, and you may be required to pay up to 31% of the amount that was paid in federal taxes.

Failure to Issue IRS Form W-2

Your small business is required to ensure that all employees have their IRS Form W-2 by January 31 of the year following the tax year in question. If the employee is no longer working at your company, you must make sure that the letter containing the W-2 is postmarked and sent to the employee by no later than January 31. If you provide W-2s late, you'll be subject to a $50 fine for each W-2 that is not provided on time. If you willfully neglect to give an employee a W-2 form, the IRS may impose additional penalties and sanctions as well.

Calculation Errors and Mistakes

Another common problem many small-business owners encounter is simple math and calculation errors. If you make errors in calculating withholding rates on your payroll tax reporting forms, you may be required to pay the same types of fines and penalties for the taxes as if the payments were made late. Generally speaking, the IRS does not provide an exception for taxes that were not paid due to an accounting or calculation error. The IRS simply deems the payment as late and assesses interest, fines and penalties accordingly. If your calculation errors resulted in an overpayment, you may be able to request a refund - but it will generally require a lot of paperwork and may take a long time to be credited to your employer payroll tax account.

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