When looking at their paychecks, employees may be confused by the number of taxes and withholdings they see. Companies are responsible for ensuring the appropriate amounts are removed each month and appropriately accounted for. These payroll taxes can be somewhat difficult to understand, but businesses will encounter even more problems if they fail to pay them. Let’s take a closer look at what is included in payroll taxes and the consequences of noncompliance with IRS withholding procedure:
“The current Social Security and Medicare tax rate is 7.65% for 2016.”
Payroll taxes consist of two different types
Not only are employers required to pay certain taxes for their employees, they are also in charge of collecting or deducting employees’ payable taxes from their paychecks. The latter is considered the withholding portion of this document – which workers are liable for paying – and include income taxes and Social Security and Medicare. People determine how much will be withheld when filling out their W-4 forms, but they are responsible for federal, state and local income taxes. In addition, employees contribute to Social Security and Medicare, which will be available to them when they retire or reach a qualifying age.
On the other hand, the taxes employers must pay for their workers include workers’ compensation, unemployment, and Social Security and Medicare. While income taxes often vary by location, the Social Security and Medicare tax rate for 2016 is 7.65%, according to the Social Security Administration.
The negative results of not paying payroll taxes
First and foremost, Internal Revenue Code Section 6672(a) allows the IRS to take action against any responsible person – anyone who is at fault for the corporation’s lack of payment, according to the IRS. This includes people who have the authority to sign checks, officers or directors of the business or those who prepare and sign payroll tax concerns, among many other factors of responsibility. The IRS can charge a responsible person a 100 percent penalty.
The IRS does have a late-deposit system, which assesses penalties depending on the number of days a payment is overdue. It is a four-tiered policy as follows:
- 2 percent penalty for taxes 1-5 days late.
- 5 percent penalty for taxes 6-15 days late.
- 10 percent penalty for taxes more than 15 days late.
- 15 percent penalty for all amounts still unpaid more than 10 days after the first notice for deposit is received.
Criminal and civil sanctions
Continued failure to pay payroll taxes could have more serious consequences for a company. After intensive and exhaustive audits and a slew of reporting penalties – including the late-deposit fine – an unwillful lack of payment could result in a $10,000 penalty, up to five years in prison or both, according to Section 7202 of the IRC. This result will have negative effects on the business’ reputation and customer satisfaction, as organizations dealing with tax evasion may not only lose the trust of consumers, but may face bankruptcy.
Failure to pay payroll taxes has consequences that extend past those of entrepreneurs and their organizations. Employees also suffer from lack of deposit since they may not qualify for social security, Medicare and unemployment benefits when the amounts are not reported, according to the IRS. It’s crucial for businesses to ensure they are reporting their payroll taxes in an accurate and time-sensitive manner to avoid serious negative effects.
If your organization needs help with its payroll taxes, contact 855-591-9863 to learn more about Payroll Tax Management and what our company can do for you.