IRS Increases Monitoring of Payroll Tax Payments
IRS Early Interaction Initiative
As an employer, you collect payroll taxes from employees. Then you are required to pay those taxes to the IRS. But many employers delay making those payments for various reasons.
Now, the IRS has a new system for monitoring payroll tax payments, and it has stepped-up its efforts to make sure that employers submit those required payments on time.
The New IRS Payroll Tax Monitoring System
It's called the "Early Interaction Initiative." Don't you just love those IRS euphemisms?
Its purpose is to "help employers stay current with their payroll taxes." It also helps the IRS close the "tax gap," bringing in more revenue. The IRS wants to be sure these taxes are paid on time, to minimize the cost of collections for the IRS and the cost of fines and penalties to employers.
Payroll Taxes Are Trust Fund Taxes
Businesses with employees must withhold federal income taxes and FICA taxes (Social Security and Medicare taxes) from employees and add to these withholdings an amount equal to the FICA tax from the employer. These taxes must be set aside for payment to the IRS, not used for any other business purposes. They are called trust fund taxes because they are held in trust.
How the IRS Will Monitor the Program
The IRS will begin by reviewing employer payments for payroll taxes, all of which come through the EFTPS (Electronic Federal Tax Payment System) process. These tax deposits must be made by 8 p.m. the day before the due date, to be counted as on time.
The IRS says it "will monitor deposit patterns and identify employers whose payments decline or are late."
Employers who haven't paid payroll taxes may receive one or all of these notices:
- Some employers may receive letters from the IRS asking them to contact the Service.
- Other businesses may receive automated phone calls with information and suggestions for assistance.
- And, "where appropriate" and IRS revenue officer may come to a business personally.
Note that the IRS won't wait until the quarterly payroll tax report (on Form 941) is received to begin this process. An alert may be given by the computerized system within a few days after the tax payment is due.
Accountant Kenneth Reid reports that, if the business doesn't pay on time after these initial efforts, the IRS may seek court injunctions to require timely payment.
Who Is Liable for Payroll Taxes
Having a business, even a corporation, doesn't relieve you of the personal responsibility for payment of payroll taxes. Your responsibility for payroll taxes as an employer includes all aspects of the process, including collection, withholding correct amounts, and filing payroll tax reports.
The IRS looks at responsible parties, basically anyone responsible for collecting, accounting for, or paying payroll taxes.
Penalties for Late Payment of Payroll Taxes
Penalties for late payment of payroll taxes are called trust fund penalties, based on the trust fund tax I mentioned above. Fines and penalties can pile up quickly. The penalty rates are from 2% to 10% of the overdue deposit, based on the lateness of the payment.
In addition, a "Trust Fund Recovery Penalty" may apply, imposed on "all persons who are determined by the IRS to be responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so."
How to Avoid IRS Notice of Late Payroll Taxes
The simplest way to avoid having the IRS contact you about missed payroll tax payments is to make payments on time.
If you aren't sure what's due and when, here are some timelines:
- When you must make payroll tax deposits depends on the size of your payroll. Smaller companies with fewer employees make monthly deposits, while larger employers must make deposits on a semi-weekly basis.
- Unemployment taxes (also part of this initiative) must be paid quarterly, for any quarter in which you have $500 or more in unemployment tax to be paid.
If you are doing your own payroll, using accounting and payroll software, check to see that your software can provide you with notices when these taxes are due. You can also set up your own payroll tax calendar to make sure you don't miss a payment.
If you have your payroll taxes done through a payroll service, be sure your service is making timely payments or alerting you to make these payments. Even if the service is doing the calculations and possibly sending out the payments, you as the business owner are ultimately responsible for this task.