The old homage about “death and taxes” certainly applies to payroll. Failing to pay payroll tax can quickly lead you in hot water with one of the world’s most feared forces — the Internet Revenue Service (IRS). Unfortunately, many businesses find themselves behind on payroll taxes due to software issues, personal issues, or revenue issues.
If your business is behind on payroll taxes, resolving your unfiled taxes should be your single biggest concern. A payment that’s only 5 days late can cost your business a 2 percent penalty on top of your taxes. But the longer you wait to pay, the worse the penalties. These penalties can range from a 15 percent penalty on taxes to prison time or even business levies that can force you to close your doors.
Here’s what you need to do if you have unfiled payroll taxes with the IRS.
You’re Not Alone
Before we cover the steps you need to take as a business when dealing with unfiled payroll taxes, it’s important to note that you’re not alone. Many businesses will be (understandably) nervous, scared, and frustrated during periods of tax friction. But you’re not treading across new ground; it’s already been paved.
Every year, Silver Tax Group helps businesses that are in the exact same boat as you (or worse!) We’ve helped businesses deal with offshore account issues, emergency tax services, and even criminal tax issues. And, if there’s one thing we’ve learned during our many years helping businesses navigate the intricate world of IRS tax issues, it’s this: you aren’t the first business that’s dealing with this issue, and you won’t be the last.
The IRS doesn’t want your blood — it wants your money. As long as you act in good faith and diligently attempt to mitigate the issue with your trusted tax professional, you’ll probably be perfectly fine. It might sting. It might hurt. But you’ll get the taxes paid off, and you’ll live to do business another day.
In general, these are the most common reasons that businesses have unfiled payroll taxes:
- You forgot to withhold or deposit taxes
- You’re in financial trouble and leveraging payroll tax funds to stay afloat
- You don’t understand your depositing schedule
- A severe business situation has prevented you from paying one of your payroll tax payments
Chances are, you fit into one of those categories. Of course, there are some businesses that may have intentionally (or unintentionally) committed fraud. If you’re in this category, and you’re trying to remedy your past mistakes, immediately reach out to a tax expert who can help you with tax fraud investigations.
Understanding Your Payroll Responsibilities
As a business and an employer, you’re responsible for withholding taxes from your employees’ paychecks to use towards taxes. While every business will have a unique payroll tax structure based on location, type, wages, etc., almost every business has to withhold the following:
- State and federal unemployment taxes (SUTA & FUTA)
- Local taxes (e.g., city taxes, council taxes, school district taxes, etc.)
- Social Security taxes
- Medicare taxes
- Local, state, and federal income taxes
You’ll also probably have some voluntary payroll deductions like health insurance or employee stock purchase plans to withhold as well, but you probably handle those separately. In addition to withholding all of these various taxes and voluntary deductions, you’re responsible for the following:
- Paying your share of payroll taxes to local, state, and federal agencies
- Preparing reconciliation reports
- Ensuring that your financial reporting is paying and deducting the correct amount for (from) each employee
- Filing your payroll tax returns
When you pay your payroll taxes, you’ll pay them on a set schedule. This schedule depends on your IRS lookback period. Usually, businesses will pay income taxes, Medicare, and Social Security monthly or semi-weekly. In very rare cases, some small businesses will deposit their payroll taxes annually, though we personally only recommend this to a very few select businesses (which are almost always very small).
You’ll also pay federal unemployment taxes monthly. In addition, your business is responsible for paying local and state taxes based on the schedules provided to you by those regulatory bodies (these vary significantly).
Note: This is only for deposits. Your reporting schedule will be different. If you submit a Form 941 (the most common form), you’ll be responsible for reporting your taxes quarterly. If you filed Form 944, you’ll report your taxes annually.
What Happens if You Fail to File Your Payroll Taxes With the IRS?
The simple answer is: it depends. The action the IRS takes against you will depend on how long you’ve left your payroll taxes unfiled, previous IRS warnings for the payroll issue, and how much you owe them. To be clear — the IRS will figure out that you haven’t filed your taxes. Around 70% of the IRS’s total revenue comes from payroll taxes. They take them very seriously.
Here are a few examples of what the IRS can do if you don’t file your payroll taxes:
- Fines: The IRS charges you a 2 percent fine on taxes that are 1 to 5 days late, a 5 percent fine on taxes that are 6 to 15 days late, a 10 percent fine on taxes that are 16 plus days late, and a 15 percent fine on taxes that haven’t been paid after 10 days since the IRS first billed you. Of course, you also have to take interest rates into account — which can range from 2 to 6 percent. This can add up to an extremely significant financial figure.
- Liens: The IRS can also file a tax lien against your property until you pay your past-due taxes. These liens are essentially future actions taken against your property, which is used as collateral against your back taxes. These are typically put against real property, but the IRS can also put them against business equipment or accounts receivable.
- Levies: The IRS can also put a levy against your business bank accounts or accounts receivable to immediately collect the past-due taxes.
- Criminal actions: Finally, the IRS can take criminal action against you if they feel that you are evading your taxes.
Of course, your business will know ahead of time if the IRS is going to place a levy against you, and you’ll only face criminal actions if you are evading your taxes. But, while usually financial, the IRS penalties can be severe. And for businesses that are late on their taxes due to financial issues, those fines can sink the ship.
5 Steps to Take if You Have Unfiled Payroll Taxes
Are you dealing with unfiled payroll taxes? If so, you need to take a moment to read the following five tips.
1. Don’t Talk to the IRS Alone!
This is the single most important piece of advice. Never talk to the IRS alone. You want to be represented by a tax professional that will act in your best interest. If you go into this battle alone, you may make some critical mistakes. The agent may implicate you, your business, or your employees, and you may get asked to divulge more information than necessary — leading to additional fines and headaches.
You need to solve your payroll tax issue ASAP. You want to take back control of your life. But you absolutely don’t want to solve it by yourself. Contact a tax professional that will help you talk with the IRS and resolve your unfiled payroll issue.
2. Make Current Deposits on Time
When you’re behind on your payroll taxes, it can feel like you’re climbing up a mountain. But you don’t want to start at the base. Instead, make sure that you’re up-to-date on your current deposits, and you want to continue making current deposits in a timely manner. Don’t push back current deposits to pay back your last deposit; you’ll end up deeper in the tax hole.
Staying current on tax returns shows the IRS good faith. You want them to know that you’re serious about paying your taxes. You can always set up payment arrangements and strike deals with the IRS regarding past deposits. But that’s incredibly difficult to do if your current deposits aren’t paid.
3. Give the IRS All of the Information They Need
- List out all of your assets, including bank accounts, business accounts, investment accounts, retirement accounts, real property (i.e., houses, office buildings, vacation homes, etc.), vehicles (e.g., business cars, trucks, motorcycles, boats, etc.)
- Figure out the value (usually current market value) of all of those assets and list them
- Provide income and spending for the past three months
- List out debts
This is the form that the IRS uses to figure out how much you’re capable of paying them monthly. So, if you plan to submit for installment agreements, they will calculate how much you owe for each installment based on this information.
In addition, the IRS will ask for a variety of documents, including:
- Past and recent payroll summaries
- Accounts receivable reports
- Monthly business bills
- Bank statements
- Business account statements
- Year-to-date profit/loss statements
This probably goes “without saying,” but you should provide in-depth, accurate information to the IRS. If you don’t, your significant fines could turn into significant jail time.
4. Consider Setting up an Agreement With the IRS
Luckily, the IRS has multiple agreement types that you may qualify for to help you repay your unfiled payroll taxes. These include guaranteed installment agreements, streamlined installment agreements, partial payment installment agreements, and non-streamlined installment agreements. Each of these has different requirements that must be met, and your specific business situation will determine which installment agreement you qualify for (with guaranteed installment agreements and streamline installment agreements generally being the preferred options if you owe less than $10,000 and $50,000 respectively).
There are also other options. You could potentially qualify for an Offer in Compromise to place you into Currently Not Collectable (CNC) status — especially if paying back what you owe to the IRS would cause you “significant economic hardship.”
The sheer number of agreement types and unique payment options available to you can be overwhelming, and we heavily recommend connecting with your tax specialist to help you figure out which options make the most sense for your business needs.
5. Follow the Deadlines
It is imperative that you follow any IRS deadlines — whether those relate to payment agreements or the providing of documentation — to a tee. Failure to comply and follow any of the deadlines that the IRS sets for you can result in serious consequences. From additional fines to liens and criminal actions, forgetting a few dates can have a massive impact on your business.
Remember, the IRS can take action against your property. You can have business accounts garnished, accounts receivable and business equipment levied, and the IRS can put a lien against your real business property. Sticking to the deadlines shows good faith, and helps prevent the IRS from taking further action against you.
If for some reason, you can’t stick to a deadline, you should immediately contact your tax professional and let them know. They will help you discuss the issue with the IRS to come up with an amicable solution.
There’s a Way Out
Getting behind on your payroll taxes can be a terrifying experience. Penalties will be looming over your head, and you may start to worry about liens, levies, or even shuttering. Don’t stress out! The very first thing you should do when your business is confronted with an IRS tax issue is to reach out to tax specialists. You need someone on your side that can help you navigate the complex world of IRS taxes while fighting to ensure that you find the best possible solution for your situation.
Are you looking for tax specialists who will have your back? Do you need help remedying your unfiled payroll taxes? Contact us.