Understanding Payroll Taxes for Businesses
If you run a small to medium-sized business or even a large corporation and pay employees, you will deal with payroll taxes. Social Security, Medicare, and income tax withholding from employee wages are just part of normal business operations.
Note:
Payroll taxes plus income taxes withheld from an employee’s wages are collectively referred to as Withholding Taxes. As the employer, you essentially are holding these funds in trust until they are paid to the IRS.
As part of your business (and as required by the IRS), you need to collect and pay to the IRS taxes that are withheld from employees’ wages. Together with your share of Social Security tax, these are then deposited in your bank account before being transferred to the IRS.
You’ll probably be filing:
- A quarterly federal tax return, otherwise known as a 941 Return
- The annual Federal Unemployment (FUTA) Tax Return (940 Return)
Are You Responsible for Your Payroll Tax Problem?
What Happens if You Have a Payroll Tax Problem?
If you have a payroll tax problem and you need to deal with the IRS to resolve it, be aware that Congress passed IRC 6672 to encourage prompt payment of payroll taxes. Through this statute, the IRS can go after responsible third parties [IRC 6672].
How Do You Know if You Are Subject to IRC 6672?
Ask yourself:
- Did you have a duty to account for and collect payroll taxes?
- Were you responsible for giving them your trust fund payroll taxes?
- Did you fail to hand over your trust fund payroll taxes?
Key Issues Involved
We’re really dealing with two separate issues:
- Collecting the taxes
- Handing the taxes over to the IRS
Not handling withholding and payroll taxes properly is a serious violation with the IRS. In fact, besides the amount owed, you could also pay serious amounts in penalties and accrued interest.
What if the IRS Can’t Collect from the Company?
If the IRS can’t get it from the company, they will go after:
- Officers
- Directors
- Owners
- Others involved
The responsibility is usually held by a high corporate official in Finance who handles payments to creditors.
If the IRS can’t collect, they will move to:
- Shut down the business
- Sell the assets
Although a last move, this could prove disastrous to any business.
Frequently Asked Questions
What are payroll taxes and who pays them?
Payroll taxes are taxes employers must withhold from their employees’ wages and include Social Security, Medicare, and federal income taxes. Employers are also responsible for paying their share of Social Security and Medicare taxes. These taxes are then deposited with the IRS.
What is the difference between payroll taxes and withholding taxes?
Payroll taxes include both the employee’s and employer’s share of Social Security and Medicare taxes. Withholding taxes, on the other hand, refer specifically to income taxes and the employee’s portion of payroll taxes that the employer withholds and remits to the IRS.
What forms do businesses typically file for payroll taxes?
Businesses usually file Form 941 (Employer’s Quarterly Federal Tax Return) to report income taxes and payroll taxes withheld. Additionally, they file Form 940 annually to report and pay Federal Unemployment Tax Act (FUTA) taxes.
What happens if a business fails to pay payroll taxes?
Failure to pay payroll taxes can result in serious consequences, including penalties, accrued interest, and even personal liability for certain individuals within the company under IRC 6672. The IRS may also shut down the business or seize assets if taxes remain unpaid.
Who can the IRS hold responsible for unpaid payroll taxes?
The IRS can pursue officers, directors, owners, or any individuals responsible for collecting and paying payroll taxes if the business fails to remit them. These individuals can be personally liable under the Trust Fund Recovery Penalty provision in IRC 6672.