What If Employers Don’t Withhold Payroll Taxes?
As an employer, you have a legal responsibility to withhold payroll taxes and pay those taxes to the IRS when due. Even if you use a payroll service, you still have a responsibility to see that this is done. If you do not withhold payroll taxes and pay them correctly and in a timely manner, you could even face jail time. The consequences of not taxing employee wages can affect both the employer and the employee. It’s important to know exactly what the IRS expects as well as what the potential consequences are for failing to comply. Of course, there are myriad reasons an employer may fail to withhold payroll taxes, including emergencies, being way too busy, or economic problems. All the same, it’s important to stay on top of them, because the consequences can be serious.
Taxes that Must Be Withheld from Employee Wages
There are multiple federal and state payroll taxes that must be withheld from an employee’s wages. These include:
- Federal and state income taxes
- FICA taxes, aka Social Security and Medicare taxes
- Federal unemployment taxes
- State unemployment taxes
These taxes are known as trust fund taxes because you, as the employer, must hold them in trust until the federal tax payment in that amount is made. Of course, after you pay your employees, your work with taxes continues. You must continue to pay the employer’s share of payroll taxes, deposit the withholdings, and make sure everything is reported and accounted for.
Your employees may also opt for voluntary payroll withholdings; however, these are not required. These include various insurance premiums, retirement contributions, and job-related expenses.
Trust Fund Recovery Penalty
Unreported payroll taxes account for about $72 billion of the US tax gap. This is why the IRS comes down so hard on business that fail to withhold payroll taxes.
If you fail to withhold taxes from employee wages, you could be subject to the Trust Fund Recovery Penalty (TFRP). The TFRP is imposed on employers who fail to collect and pay sales taxes or payroll taxes. It can be imposed if you:
- Demonstrate willful failure to withhold tax
- Willfully fail to account for and pay payroll or sales taxes
- Make a willful attempt to evade your tax payment or taxes
The IRS defines “willful” failure to withhold, account for, pay, or evade taxes as “intentional, deliberate, voluntary, and knowing.” An accidental failure to withhold or pay tax does not fall under the category of willful failure or evasion. Instead, the IRS will seek evidence that you intentionally ignored the law. A TFRP is usually the amount of money the employer held from the employee’s wages that was not payed to the IRS.
You might choose to hire a third-party to help make sure you comply with everything and pay employee taxes on time. Keep in mind, though, that you are still the one who holds the liability if the third party drops the ball.
Penalties for Failure to Withhold Payroll Taxes
If you fail to withhold taxes from employee wages, you could be held personally liable for the money by state and federal agencies. Penalties are based on the number of days late the payment is. Failure to file Form 941 will incur the following penalties:
- 1 to 5 days late: 2%
- 6-15 days late: 5%
- More than 16 days late or within 10 days of first notice: 10%
- Maximum: 15%
If you fail to pay your payroll taxes in a timely fashion, the TFRP will be 100% of the unpaid tax, including interest and penalties. Failure to pay payroll taxes can also lead to criminal charges; it is a felony that carries a $10,000 fine and five years in prison.
Of course, there are some situations in which the IRS may waive penalties. This usually applies to inadvertent failure to deposit or cases during the first quarter if a business has changed the frequency of its deposits but otherwise filed the employee tax return on time. It’s important to note that these waivers only apply to business that are doing their best to comply with the rules; purposeful failure to pay employee taxes will always lead to penalties.
Contact Experienced Tax Attorneys Who Can Help
Failing to pay taxes on employee wages can affect both the employer and the employee. Although it isn’t always intentional, it can come with severe consequences. If you are an employer or an employee who has failed to pay taxes, an experienced tax attorney of Mackay, Caswell & Callahan, P.C. may be able to help.
If you have tax issues, don’t attempt to navigate them alone. A NYC tax attorney in our New York City office can help, or call 844-MCC-4TAX (622-4829) to speak with an experienced tax lawyer from one of our other offices in Albany, Rochester, Syracuse, Utica, and Watertown.