The IRS is cracking down on employers, making it clear that employers who fail to comply with federal tax laws are one of their top priorities. For a business, this means that a simple mistake can turn into a big problem, leading to an IRS investigation, back taxes, penalties, and interest. Moreover, when company officers fail to direct certain trust fund payroll tax payments properly, it could also lead to personal liability.
At Gabaie & Associates, LLC, we work hard to help our clients avoid payroll tax issues before they become a problem. This article will address some of the most common payroll tax mistakes businesses make.
Sometimes the differences between employees and contractors can be nuanced. But how you handle these workers will vary substantially regarding company benefits and payroll taxes. If you misclassify an employee as an independent contractor, you could face back taxes and accrued penalties and interest.
Every business should stick to a set schedule for payroll, both for paying workers and filing reports with the various tax entities. If you fail to pay your workers on time, you could run afoul of state and federal law and erode workers' trust in your company. Similarly, filing wage reports with federal, state, and local tax authorities and paying quarterly taxes is essential to keep your company in good standing. Late payments can result in penalties and interest and, in some cases, personal liability for company officers.
Under federal law, you must pay your employees time and a half for overtime wages. Your state may have different regulations as well. If you fail to pay the correct amount in overtime, you could face employee complaints, back payments, penalties, and interest.
Paying the Wrong Rates
State and federal tax rates can change every year. Your business will need to ensure that it's paying the correct rates for federal and state income taxes, social security and Medicare taxes, unemployment taxes, and local income tax. If you fail to pay the correct rates, you could face back taxes, penalties, and interest.
Not Keeping Accurate Records
As an employer, you must keep accurate payroll records, including hours worked, wages paid, holiday bonuses, overtime, vacations, and sick pay. If the IRS or state tax authority requests documentation, you'll need these as a backup.
Penalties for Payroll Tax Errors
If your business fails to file payroll taxes, it could face a failure-to-file penalty of five to 25% for each month. Continued failure to pay could result in a levy on your accounts receivable, garnishment on company bank accounts, and liens attached to your business equipment and real property. For “careless, reckless, or intentional disregard” of tax rules, your business could face up to 50% in interest on any underpaid taxes.
Even if it's been a few years, that doesn't mean you're in the clear. The statute of limitations for your tax liability is ten years. That means the IRS can come after your business for the unpaid taxes up to ten years after the error. For willfully failing to pay or direct payment of trust funds, you could face personal liability for up to three years.
Hire an Experienced Maryland Tax Attorney
Ensuring that you don't make mistakes with payroll taxes and trust fund contributions can be complicated. You need legal guidance from an experienced tax attorney to avoid problems. Whether you're trying to set your business up for success or already facing an issue with the IRS, the experienced tax attorneys at Gabaie & Associates, LLC can help. Our specialty is helping business clients proactively address tax issues before they become critical. Contact us online or call Gabaie & Associates, LLC, at 410-358-1300 for a free consultation.