There are many reasons a business might get into trouble with payroll taxes. Payroll tax return issues fall into two categories.
The first is not filing the returns. The penalties for not filing a payroll tax return are 5 % a month with a maximum of 25 % of the tax due with the return. Payroll tax penalties are usually much higher than the penalties on income tax balances because the taxes withheld are generally higher. A quarterly payroll of $ 100,000 might easily have a penalty due of $ 30,000. That is for the federal income tax, Social Security and Medicare taxes withheld from the employees in addition to the employer match of Social Security and Medicare taxes. If that return is filed five months late, without the proper payments, and the maximum penalty of 25 % is assessed, in addition to the interest. If the returns are filed on time but not paid then there is no late payment penalty.
The second is not paying the taxes when due. In addition, there is a penalty for the failure to make timely tax deposits. The withheld income tax, Social Security tax and Medicare tax are known as “trust fund” taxes. That means the employer withheld them in “trust” for the IRS. If they are not paid the IRS will conduct an investigation in order to determine who was the person responsible for not paying the taxes when due. They interview the people involved to determine who paid all the other bills first and not the IRS. They want to know who made the decision to use the employees’ taxes to pay the companies bills. They will then assess a Trust Fund Recovery Penalty against those individuals for the amount of the withheld taxes not paid to the IRS. The responsible person does not need to be the owner, or all the owners. It could be a non-owner with the financial making decision power who kept the owner in the dark. It could be the bookkeeper who was embezzling funds. The IRS will then attempt to collect the unpaid taxes from those individuals. None of their assets or income is protected from the collection procedures.
