If your business has a tax issue with the IRS due to unpaid payroll tax debt, you might have options for relief.
Here is what you need to know about payroll taxes, payroll tax debt, and payroll penalty relief.
What Are Payroll Taxes?
Payroll taxes are the money that comes out of an employee’s paycheck to fund Social Security and Medicare. As of this writing, payroll taxes total 15.3%: 12.4% Social Security and 2.9% Medicare.
W-2 employees pay half of Social Security taxes (6.2%) and Medicare taxes (1.45%), and employers pay the remaining half of payroll taxes.
Self-employed and independent contractors with a 1099 are responsible for the entire 15.3% self-employment tax.
How Do Payroll Taxes Differ from Income Taxes?
Payroll taxes differ from income taxes in that they are used to fund two specific programs — Social Security and Medicare. Income taxes, by contrast, fund the government as a whole and are used to pay for everything from interstate highways to national defense.
Unlike income taxes, payroll taxes are not tiered based on your income. Everyone pays the same flat percentage.
As of 2022, the Social Security portion of payroll taxes is assessed on the first $147,000 of income (up $4,200 from 2021), while the Medicare portion of payroll taxes does not have a wage cap.
What Is IRS Form 941?
IRS Form 941 is a tax form that employers must file if they have W-2 employees on whose behalf they are required to pay Social Security and Medicare taxes.
On the 941 form, which is filed quarterly, the employer reports information such as the number of employees they have, the yearly earnings of each employee, and the amount the employer withheld from each employee’s check for payroll taxes that quarter.
What Are the IRS Penalties for Late 941 Returns and Late 941 Payments?
Individuals or businesses who are late filing their 941 form or paying payroll taxes might be subject to IRS penalties. The possible tax liability penalties for 941 tax issues include:
Late 941 Return Penalty
Filing your IRS Form 941 late results in a penalty of 5% per month of the total tax due. The penalty is capped at 25% of the total tax due.
Late 941 Payment Penalty
Paying your Social Security and Medicare taxes late, or only paying part of your payroll tax debt by the due date, results in an IRS penalty assessed on the unpaid payroll tax balance.
The late 941 payment penalty can range from 2% to 15% depending on how many days late.
Are Business Owners and Corporate Officers Personally Liable for Back Payroll Taxes From 941 Tax Liability?
If a business, such as a corporation or LLC, fails to pay Social Security and Medicare taxes on behalf of its employees, then yes, the liability for paying the payroll back taxes does fall on the owners or corporate officers of the business.
How Do Business Owners and Corporate Officers Settle Back Payroll Taxes When They’re Personally Responsible for 941 Tax Liability?
A business owner or corporate officer who owes back payroll taxes on behalf of their company has similar tax relief options as individual taxpayers for settling their payroll tax debt and seeking payroll penalty relief:
Installment Agreement (IRS Payment Plan)
An installment agreement is smaller monthly payments to the IRS to pay off unpaid payroll tax debt over time rather than paying the full amount at once. Read more about IRS Payment Pans.
Offer in Compromise (OIC)
An Offer in Compromise lowers the amount you owe the IRS when you have a severe financial hardship, so that you do not have to pay the full amount to settle your payroll tax debt. Read more about Settling IRS Tax Debt.
Currently Not Collectible (CNC)
Currently Not Collectible status temporarily delays collection of your payroll tax debt if you cannot make any payments. This means your income only covers your basic living expenses (or less) and you have no assets that the IRS can levy.
Who Qualifies for Payroll Tax Deferral and Payroll Tax Penalty Relief?
Many businesses qualified for payroll tax deferral in 2021 because of temporary tax law changes for the coronavirus pandemic. Businesses could pay half of their owed payroll taxes by the end of 2021 and defer the rest until the end of 2022.
To qualify for payroll tax penalty relief, a business had to show evidence of a significant decline in revenue, or a government-mandated partial or full closure of the business due to COVID-19.
How Can Wiztax Help?
If you are or your business is facing any kind of payroll tax issue, we are here to help with back taxes and tax relief services! Call us at (866) 568-4593 to learn more about exactly what we can do for you.
Or start here to take our free online evaluation.
6 Simple Questions. Free Evaluation.
Join our Newsletter
Enter your email address to join our free newsletter. Get all the latest news and updates.