There’s nothing fun about your business owing money to the Internal Revenue Service (IRS), especially when you made an honest mistake or omission. Unfortunately, this scenario is common. In 2016, the IRS assessed civil penalties against six million businesses for mistakes or omissions with payroll tax and just under one million paid a penalty related to income tax for their business. Payroll liabilities can be a complex topic, but the IRS expects full compliance, nonetheless. Below are some tips to help avoid paying unnecessary fines to the IRS.
Start by Understanding Which Types of Payroll Tax You Need to Pay
As an employer, the IRS requires you to contribute towards the federal unemployment fund based on the combined total of the gross salaries of your employees. You must arrange to pay federal unemployment taxes either annually or quarterly and use Form 940 to do so.
Employers need to withhold federal and state taxes as well unless your business has a physical location in a state that does not collect income tax. Each employee completes a W9 form that indicates the number of exemptions when starting with your company. Your payroll department uses that information plus the effective tax bracket for each employee to determine state and federal tax amounts.
Both employers and employees contribute to the cost of paying social security and Medicare taxes, known jointly as FICA taxes. This stands for Federal Insurance Contribution Act. For 2020, employers and employees each contribute 7.65 percent for social security and 1.45 percent for Medicare. The wage base for collection of FICA taxes increases to $137,700 in 2020 as well.
How to Avoid Incurring IRS Penalties
Failing to make payroll tax deposits on time or making a submission error can cost you between two and 15 percent of the deposit in fines depending on the number of days past due. While the IRS accepts payment plans, it’s best not to get into that situation in the first place.
It’s essential for your company to budget to avoid the problem of not having the money available when the time comes to make payroll tax payments. If you’re not sure how much of your business budget to designate for payroll liabilities, take the average from the last four quarters and set aside at least that much. Be sure to monitor compliance with your payroll department frequently and read every correspondence from the IRS. It won’t take too kindly to your business ignoring a request when it has proof of sending a letter.
Why Outsourcing Your Payroll Makes Good Business Sense
More than 50 percent of small businesses outsource payroll because owners simply don’t have the time to do it or the budget to hire in-house staff. However, the benefits of outsourcing go beyond that. When you trust Palmetto Payroll to process employee paychecks, you can feel confident that we keep up with all applicable IRS regulations and work proactively to ensure you never face a fine. Please contact us today to learn more about how we can manage your small business payroll as well as provide several other administrative tasks.