Are you aware of payroll tax liability? You probably have questions like “What is payroll tax liability?” and “why do I have to pay it?” If so, you’re not alone! If you find yourself owing payroll taxes, it can be confusing and you may not know where to begin. In this blog, we will cover what payroll taxes are and what to do if you owe them.
What is payroll tax liability?
Payroll taxes are required when an employee works for a company and receives a paycheck for their work. This can include the federal income tax, state income tax, unemployment tax, Social Security, and Medicare tax. Payroll taxes can be withheld at each pay period, whether weekly or semi-monthly.
Certain types of wages and compensation are not subject to social security and Medicare taxes. Payroll taxes also include state employer and employee income tax liability.
The employer calculates the taxes for the employee’s wages
Most employers must calculate and also, withhold payroll taxes from their employee’s wages.
These taxes are not deducted immediately. Instead, the employer has to contribute a portion of the taxes to the Internal Revenue Service (IRS), which is known as an employer share of payroll tax.
Other payroll costs of course, we can’t forget about the other types of deductions that you might withhold from an employee’s wages. You may need to handle health insurance contributions, retirement fund contributions, or wage garnishments. These are considered voluntary deductions.
Unlike other types of taxes, however, payroll tax liabilities are deposited to the IRS after a specified period of time. This depositing schedule may change depending on the amount of tax liability a company had in the previous four quarters.
Always keep tax records for your business
When calculating payroll tax liabilities, companies should keep records of the payroll taxes they have paid. Federal tax law requires businesses to keep payroll tax records for four years, while state laws vary.
In some cases, employers may be penalized for submitting payroll tax reports late. To avoid penalties and interest fees, companies should consider enlisting the services of a payroll software provider, or even a professional employer organization.
Federal income tax and state income tax withholding
While employers generally pay federal income tax, they may also owe state and local taxes. Federal unemployment tax, Social Security, and Medicare tax are three of the most common types of payroll tax liability.
Other taxes may be paid by employers, depending on the type of business they run. In addition to federal taxes, employers must pay state and local taxes if they employ workers.
Additional payroll taxes
In addition to federal taxes, employers may be required to pay FUTA or Federal Domestic Workers Tax (FUTA). Employers pay unemployment taxes, and along with money from the federal government and states, employees can collect weekly payments when they lose their job.
Why do I have to pay my payroll tax liability?
In business, you may wonder: “What is payroll tax liability?” In essence, it is the amount of Social Security, Medicare, federal income tax, and income tax withholdings you owe. These taxes are paid by both the employee and employer.
The employer withholds these taxes and remits them to the government. The taxes are not a part of the employee’s paycheck; rather, they are an advance payment to the government from the employer.
How do I know if I owe payroll tax liability?
If you’re a payroll taxpayer, you need to keep all of your records. You should maintain these records for four years, and state tax laws vary slightly. The records can be in any format, but they must be sufficient to enable the IRS to determine if you owe payroll taxes.
Payroll tax compliance is important for your business
Payroll tax compliance is vital to the success of your business, and if you’re not up to date, you could face a hefty fines, jail time in extreme cases, and other severe consequences. However, you can defend yourself from prosecution if you can prove that circumstances were beyond your control.
Examples of such circumstances include the destruction of your business, the theft of your money, or the failure of your bank to deposit payroll taxes. While these are very rare, they are available if necessary.
Curious about how to avoid paying your payroll taxes?
Despite the risk of a lawsuit, there are ways to avoid paying payroll taxes.
- Avoid hiring an unqualified employee because this may result in a tax audit.
- Hire a tax attorney with extensive experience in payroll tax cases. Your tax attorney can help you decide whether you owe payroll taxes or not.
If you don’t owe payroll taxes, you may be able to negotiate a settlement with the IRS.
What are my options for paying back my payroll tax liabilities?
Like most unpaid tax problems in business, the IRS treats payroll tax liability seriously and won’t relent once it begins pursuing you for business. The IRS will take every opportunity it can to collect your back taxes, engaging in hostile legal actions that can ultimately cost you your business and your livelihood (depending upon your liability).
Understand that skipping payroll tax can land you behind bars!
The IRS is highly aggressive when assessing penalties for failing to pay payroll taxes. Since payroll taxes are government-owned, failing to pay them can result in a criminal conviction. And because these taxes can add up faster than individual income taxes, the penalties can be substantial.
If you fail to pay, the IRS can refer your case to the criminal division, as well as the department of justice. Ultimately, this could result in jail time and massive fines.
Not paying payroll taxes could end up costing you so much more
Failing to pay your payroll taxes can eventually mean owing overly burdensome fines and even prison time – would you take the risk? Most people wouldn’t, which is why paying off your business’ tax liability should be among your most important concerns right now.
Start dealing with this yesterday!
You read that right: start dealing with this yesterday.
What we’re trying to say here is that it’s never too soon or too late to begin working on dealing with payroll tax liability. For the reasons we just described, you’ll want to start working on solutions to protect yourself and your business immediately.
There’s never a better time to start than right now, and within 24 hours you’ll feel better that you started yesterday.
Get current on past years’ tax returns
Even if you don’t currently have money to pay your tax liability for years past, you should make sure you get current on any unfiled tax returns.
Begin with the most recent return currently due (such as this year’s) and go back in chronological order to file whatever returns and payroll taxes are outstanding.
Start paying your tax bills as soon as possible
If you have money to put toward your tax bills, pay down the most current return first to show the IRS that you’re making a serious effort to catch up with the other payroll back taxes you owe.
This demonstration of good faith could afford you some capital (strictly figuratively speaking!) down the line should you need to ask the IRS for forms of tax debt relief, such as an offer in compromise or installment agreement.
Don’t deal with the IRS yourself – get a tax relief attorney!
You’ve heard it all before: The IRS isn’t your friend. Additionally, the IRS isn’t interested in doing you favors unless it believes the cost of coming after you will outweigh what it would get now by striking a deal.
Besides, if you try to handle the IRS yourself on a sensitive matter like this, you run the risk of making your situation worse.
Working with an experienced attorney can save you time and energy
When it comes to interfacing with the IRS at any point in the process of paying your outstanding payroll taxes, get a tax relief attorney to walk you through the process and deal with the IRS for you.
Tax attorneys speak to the IRS constantly and have a better understanding of how to communicate and who to communicate with to get the best outcome for your situation.
Let your attorney speak to the IRS for you
This professional’s bread and butter is based on calling IRS agents for clients like you. Good attorneys are focused on applying their knowledge of the U.S. tax code to help your situation while minimizing the risk of exposing you to other liabilities you may not have otherwise foreseen.
Get current with your payroll tax deposits
Do everything you can to make your current payroll tax deposits and do so before you try to begin negotiation with the IRS.
As we said before with trying to pay down as much of your most recent debt as possible, making an effort to stay current with your deposits can earn you some brownie points before you begin negotiating with the IRS.
And by brownie points, we mean signs of good faith that you can be trusted to afford an offer in compromise, installment plan, or another form of IRS tax debt relief.
Making an effort toward resolving your tax debt, even if small, is helpful
It will also help you avoid sinking deeper into payroll tax debt, making you feel like the steps you’re taking now will ultimately be futile. But no matter what you do to try resolving any tax debt, it’s never wasted time or opportunity!
File Form 433-B & prepare your documentation
Your tax relief attorney should walk you through IRS Form 433-B and the preparation of financial documentation to prepare you for negotiating your debt relief with the IRS.
Form 433-B will ask for details about your business such as its income, assets, expenses, and debts.
What documents do you need for Form 433-B
You’ll need to back all of this up with documentation that includes bank statements, profit and loss reports, copies of your company’s bills, recent payroll reports, and proof of federal tax deposits.
All of this combined will help the IRS determine what your company makes and how much it can afford to pay toward its payroll back taxes month-to-month.
Write a request for an installment agreement or offer in compromise
An installment agreement or an offer in compromise are two ways business owners can work toward resolving their unpaid payroll tax debt. In an installment agreement, you’ll be asking the IRS to agree to a payment plan to pay off your owed taxes over time. An offer in compromise would be an offer to pay the IRS a considerable lump sum that’s less than your overall tax liability and have the rest forgiven.
Check out this article for a better understanding of an offer in compromise.
Talk to your attorney about either of these or other payroll tax debt relief options that might apply to your situation and let them handle it for you.
Do you need help from a tax attorney?
If you need legal assistance when it comes to dealing with outstanding payroll tax liabilities, turn to Damiens Law Firm, PLLC for help. We support individuals and businesses with a variety of tax law services, including relief, and we’re prepared to help you.
Talk to an experienced tax attorney today
Contact us online or call (601) 957-9672 to schedule a free consultation where you’ll have an opportunity to tell us about your business’ payroll tax situation and learn more about how our services can help you get out from under liability.
