What Payroll Taxes Is a Business Required to Pay?
Employers are required to pay Social Security and Medicare (FICA), federal, state, local, and unemployment insurance taxes. Only five states mandate company owners pay disability insurance taxes: Rhode Island, New York, Hawaii, California, and New Jersey.
The 2023 Social Security tax rate for employers is 6.2%. The 2023 Medicare tax rate for employers is 1.45%. The IRS also mandates that employers must withhold the “additional Medicare tax” of 0.9% on employees to which they have paid more than $200,000 in one year.
How Do Employers Calculate Payroll Taxes?
Calculating payroll taxes involves determining taxable wages, determining the number of taxable workers on the payroll, and calculating withholding amounts. The IRS defines employees as “workers who perform one or more services for an employer if the employer has the right to control what is done and how it is done.”
Independent contractors are typically not considered employees and are not included in calculating payroll taxes.
When are Payroll Taxes Due?
The date due for payment of payroll taxes depends on multiple factors, such as the employer’s past filing history and the types of returns on which the taxes are reported. Employers should be aware that payroll taxes do not have the same filing due dates as other tax returns.
In addition, employers need to submit federal tax deposits via the IRS Electronic Federal Tax Payment System (EFTPS). Be aware that simply depositing federal payroll taxes does not remove the obligation to file a return.
For more information about due dates for payroll taxes, visit the IRS page regarding payment options and payroll tax due dates: https://irs.gov/businesses/small-businesses-self-employed/employment-tax-due-dates.
What are the Types of Payroll Tax Penalties?
Employment or payroll tax penalties are government-issued fines on employers who fail to report or remit payroll taxes. When an employer knowingly fails to collect taxes from employee earnings or they don’t pay taxes, the IRS will likely slap a Trust Fund Recovery Penalty (TFRP) on that employer.
According to the IRS, employers who “willfully fail to pay, deposit, account for, or withhold specific taxes” may be held personally responsible for penalties equal to the unpaid trust fund tax and any interest accrued. For payroll tax purposes, the IRS defines “willfully” as intentionally, consciously, or voluntarily.
How Much is the Late Payroll Tax Penalty?
Penalties depend on the size of the company, the amount owed, and if payments were late or simply not sent to the IRS. The tax penalty for payroll taxes that are one to five days late is 2%. The tax penalty for payroll taxes more than 16 days late is 10%.
If an employer receives a past-due notice from the IRS and does not make a payment within 10 days of receiving that notice, the tax penalty is 15%.
Employers receiving a TFRP notice may be eligible for reduced penalties if they can prove one or more of the following:
- A natural disaster or fire prevented them from reporting payroll taxes by the due date.
- They could not obtain records for verifiable reasons.
- A serious illness or death delayed reporting of payroll taxes.
The IRS does not consider a lack of funds as a qualifying reason to abate late payroll tax penalties.
Can the IRS Place Liens on Business Assets After Assessing Payroll Tax Penalties?
Federal tax liens are legal claims brought by the IRS against a person’s property if they do not pay, or make payments, on a tax debt. So, yes, the IRS can place a lien on a company’s assets if the owner fails to make payroll tax payments after being sent the appropriate IRS lien notices.
Asset liens are placed on businesses that owe back tax payroll penalties can negatively impact their credit score and significantly decrease the value of their business. In addition, filing bankruptcy after a lien has been placed on company assets may not remove the lien after bankruptcy is completed.
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