How to Avoid Payroll Tax Penalties for Businesses in 2023

Tax Penalties

Taking care of payroll tax responsibilities is an important task for businesses. Costly fines may be imposed for failure to comply with these duties. A common penalty is failing to make timely payroll taxes deposits, including FICA taxes (Social Security and Medicare). Fortunately, businesses can avoid these penalties in a few easy ways.

Pay Your Taxes on Time

The easiest way to avoid penalties is to file and pay on time. The IRS imposes a failure-to-file penalty of 5% of the unpaid tax for each month or portion of a late return. Additionally, it establishes a 0.5% late payment penalty for each month or portion of a month that the taxes are not paid. Planning and setting aside money regularly for payroll tax liabilities throughout the year is a good idea. 

You should also take into account any state and local payroll tax obligations. Most of these are due quarterly, and some have specific deadlines.  The IRS will waive penalties if you can establish that there is reasonable cause for failing to file or pay. However, you should immediately contact the agency and devise a plan to pay what is owed. If you don’t, the agency can levy your assets, including your company bank accounts, company officers’ wages and even your inventory.

Pay Your Taxes in Full

Generally, you can avoid penalty charges by paying your taxes in full by the tax deadline. However, if you cannot pay your balance by the due date, consider requesting an installment payment agreement (IPA). The IRS can offer this option for taxpayers who cannot pay their entire tax bill by the original filing due date. The agency will work with you to determine a payment plan for your needs and budget. When determining your payroll tax payments, include all required income and deductions. It consists of both federal and state taxes. It also includes any property tax you may be obligated to pay. If you are still getting familiar with local and state tax laws, consult a professional who is.

The penalties for failing to file or pay your taxes are steep. Not only do they cost your business time, but they can also add up to substantial sums in fines. While managing your taxes can seem complicated and daunting, with a little bit of planning and help from a professional, you can minimize the chances of penalties and stay in compliance. Get the help you need today! Contact payroll solutions providers like ADP to simplify your payroll taxes, making filing on time easy and ensuring you comply.

Don’t Borrow from Your Payroll Tax Fund

The IRS isn’t going to send you to jail for failing to remit payroll taxes, but that doesn’t mean it won’t hit you with some serious fines. It’s not uncommon for business owners to forget to factor in tax payments when creating a budget. Those taxes include income, Social Security, Medicare and federal and state unemployment taxes. As the name suggests, payroll taxes are deducted from employees’ gross pay before they receive their paychecks. Unlike other taxes, however, the size of the charge depends on how much an employee earns rather than their overall taxable income.

Payroll taxes are a massive part of the government’s revenue pool. In 2021, they accounted for nearly a third of all federal tax revenue. Despite their importance, payroll taxes are often complicated for small businesses to manage. Manual processes and disconnected software can lead to miscalculations, late filings and missed withholding deposit deadlines. Even more problematic, if you intentionally fail to withhold or deposit payroll taxes or file them late, the IRS will punish you by imposing a trust fund recovery penalty. Unlike other disadvantages, this one isn’t waived for good behavior. It applies even if you have a solid reason for missing your tax obligations, such as the Covid-19 pandemic. To avoid this penalty, have a bookkeeper who can handle your payroll tax deposits and submissions.

Don’t Underpay Your Taxes

Payroll tax penalties can be costly for businesses, especially small businesses. However, with some planning and the help of a technology solution, companies can avoid the pitfalls of payroll taxes and stay on the IRS’s good side. While there are many different types of payroll taxes, they all have one thing in common: employers must file and deposit them regularly. It includes federal income tax withholding, FICA (Social Security and Medicare) contributions from the employer and employee, and state and local unemployment taxes. These payroll taxes must be calculated and withheld from employees’ paychecks and deposited regularly (usually quarterly for most businesses). Failure to make deposits according to a set schedule can result in penalties.

The most common type of payroll tax penalty is the underpayment of estimated taxes. It is assessed when a business needs to pay more tax withholding throughout the year to cover all its estimated tax obligations. It is usually due to a simple mistake that can be easily corrected by calculating the amount you owe and adding it to your next quarterly deposit. While it may seem difficult to keep up with all the different rules and regulations about payroll taxes, businesses need to do their best to remain compliant. By staying organized, utilizing software that makes the process easier, and consulting a professional when necessary, companies can minimize their risk of incurring costly penalties.

Shashank Sharma
Shashank is a tech expert and writer with over 8 years of experience. His passion for helping people in all aspects of technology shines through his work. He is also the author of the book "iSolution," designed to assist iPhone users. Shashank has completed his master's in business administration, but his heart lies in technology & Gadgets.

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