As a SMB owner, you are required to withhold employee payroll taxes and make federal and state payroll tax payments to the government, as well as filing the proper reporting and informational returns. The money withheld from the employees is held in trust by the business owner. It is not for use by the business, but to be paid to the US Treasury.
Payroll tax rules are complex and penalties for noncompliance are much more severe than the penalties of other taxes. The IRS operates under the "guilty until proven innocent" concept and have the power to show up unannounced and padlock your front doors, putting you out of business -- without obtaining a court order. They can seize all of your business assets, bank accounts and charge you criminally.
What if I haven't collected, filed or paid payroll taxes?
Whether you operate your small business as a sole proprietorship, partnership or a corporation, the taxes you owe can cause you to lose your business as well as your personal assets. There are three major penalties you can be hit with... failure to file, failure to deposit, and the failure to pay. These penalties assessed on delinquent payroll tax deposits or filings can add up quickly and dramatically increase your total tax bill.
Also, not filing or paying your payroll taxes is considered a federal crime. The IRS can come after business owners AND liable employees for payroll taxes owed. They can access what is called the Trust Fund Recovery Penalty against owners and liable employees.
So, what taxes do I have to pay on behalf of my employees?
You must withhold part of Social Security and Medicare taxes from employees' wages and the business pays a matching amount. You must also withhold federal income tax from employee's wages and in most cases, deposit all withholdings 3 days after the pay date of the pay checks.
Federal and Texas Unemployment Tax
The business is entirely responsible for the Federal Unemployment Tax. You must report and pay this tax separately using your own funds. Employees do not pay this tax or have it withheld from their pay.
In addition, Texas also requires businesses to pay the Texas Unemployment Insurance Tax. This tax funds unemployment compensation for workers who lose their jobs. This tax is paid by you and not collected from employees. This tax is due quarterly and collected by the Texas Workforce Commission.
What should I do?
The IRS knows that small business owners are the largest source of uncollected taxes - putting an audit target on small business owner's backs. Here are some steps you should take to protect yourself from the IRS:
- Make sure you setup your payroll accounting system correctly. Accounting software like QuickBooks does not prevent you from setting up your payroll incorrectly. Payroll tax rules are very complex, so seek the help of a professional when setting up your payroll accounting system.
- Have a professional review your payroll tax return before you file it each quarter. Big mistakes can be made on the payroll tax return that triggers a letter or a visit from the IRS, even though you have paid your taxes. Something you really don't want to have happen to you.
- Make sure you pay your payroll taxes on time. Set up a separate bank account from your operating funds so you don't accidentally spend the money you were withholding from the employees pay.
- Use a payroll service. It is a good alternative to doing payroll yourself. However, as you read through the cases on the IRS website, you will see many involve payroll company executives and their misuse of the payroll tax money they withheld from customers. If you use a payroll company, then go with a reputable company. Remember, they just put in what you tell them into their system, calculate the taxes, automatically prepare the return and send it to the IRS. There is no professional review by somebody who knows your business and the payroll tax laws. In other words, a payroll company doesn't make sure that your payroll return is right.
At Fisher CPA Firm, we have a multi-step review process we apply to each of our clients payroll tax returns when we are entrusted to prepare them. We spend the extra time to make sure your payroll tax return is correct and the IRS will not be sending letters to you.