Small Business Taxes & Management

Special Report




 

Small Business Taxes & ManagementTM--Copyright 2015, A/N Group, Inc.

 

The IRS has launched a new initiative designed to more quickly identify employers who are falling behind on their payroll or employment taxes and then help them get caught up on their payment and reporting responsibilities. The effort is called the Early Interaction Initiative.

The initiative is designed to help employers stay in compliance and avoid needless interest and penalty charges. The initiative will seek to identify employers who appear to be falling behind on their tax payments even before an employment tax return is filed. The IRS will offer helpful information and guidance through letters, automated phone messages, other communications and in some instances, a visit from an IRS revenue officer.

In the past, the first attempt by the IRS to contact an employer having payment difficulties often did not occur until much later in the process, after the employment return was filed and the employer’s unpaid tax obligation had already begun to spiral out of control.

Two-thirds of federal taxes are collected through the payroll tax system. By law, employers must withhold federal income, Social Security and Medicare taxes from employees’ wages.

Shortly after employees are paid, employers typically must turn over withheld amounts, along with employer- matching contributions, to the federal government. Though payment schedules vary, these payments, known as federal tax deposits (FTDs), are made electronically through the Electronic Federal Tax Payment System EFTPS. These FTDs are later reported on a return , usually filed quarterly, with the IRS.

Employers, especially those facing liquidity difficulties, sometimes inappropriately divert funds withheld from employees’ pay for working capital or other purposes. Even when well-intentioned, such diversions can quickly result in mounting tax liabilities for the employer, along with interest and penalties, potentially threatening the employer’s financial viability.

Also, employers may have a payroll processor or others handling their payroll, withholding, matching, remittance, and/or reporting responsibilities, which sometimes leads to miscommunication between the parties and may result in tax deposits and reporting not being made as required. Such miscommunication may also quickly result in mounting tax liabilities, interest and penalties that are costly and risky to the business.

To help employers avoid these problems, the new IRS initiative will monitor deposit patterns and identify employers whose payments decline or are late. Employers identified under this initiative may receive a letter reminding them of their payroll tax responsibilities and asking that they contact the IRS to discuss the situation. In addition, some employers may receive automated phone messages from the IRS providing information and assistance. Where appropriate, an IRS revenue officer will also contact some of these employers at their place of business.

The IRS is very concerned about undeposited taxes, and you should be too. Being short on cash to make the deposits is a red flag that the business is in trouble. Even if you just don't understand the rules or are a procrastinator, failure to made the deposits is foolhardy. The penalties can add up quickly. The basic one is 2% for deposits 1 to 5 days late; 5% for 6 to 15 days late and 10% for 16 or more days late. Businesses can get in a vicious cycle of being late, paying the penalty and taxes, then not having the funds to make the next payment. In addition, owners, shareholders, officers, etc. can be held personally liable for the taxes and they're not discharged in bankruptcy.

Here are the basic rules:

Keep in mind that these are the very basic rules. It's easy to break the $50,000 threshold and become a semiweekly depositor. As little as $150,000 in payroll per year (depending on the income tax withholding of course) can trigger it.

This is not the place to go it alone. If your payroll is relatively stable (say 4 employees getting the same paycheck every two weeks) you might be able to get away with handling it in house. If it starts to get tricky (different paychecks, more frequent payments, more employees) you should consider a reputable payroll service. You don't need more than one or two penalties per year to make the payroll service look cheap.

If you're doing your own, consider overpaying your deposit. Leaving a cushion in and carrying it forward every quarter could allow you to avoid a penalty if you make a mistake. It could be a good use of your funds.

You can find help at the IRS web page Employment Taxes. Also see IRS Publication 15 (Circular E) Employer's Tax Guide.

 


Copyright 2015 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536


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--Last Update 12/11/15