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I forgot to pay my payroll tax! Now what?

Dec 4, 2019 | 5 minutes read | Grow your team

Phew. You just finished up payroll and now you can head into the weekend. But wait – you forgot to pay taxes on it?! Scrambling, you try to figure out what to do.

Unfortunately, whatever your reason, the IRS and other tax agencies care quite a bit about this - and you could face significant penalties.

But luckily, we’ve got a plan to help you. To take a step back, let’s first return to what you’re typically required to do as an employer in the realm of payroll taxes.

Your responsibilities for payroll taxes

You are required to withhold taxes from your employees’ wages and to pay those taxes to the government. Those could include:

· State, and local income taxes

· Federal (FUTA) and state (SUTA) unemployment taxes

· Federal Employment Tax (Income, Social Security and Medicare) · And also, any state-specific taxes that might be relevant.

Once withheld, you must then deposit income taxes, Social Security, and medical taxes on the right schedule. Typically this is either monthly or bi-weekly. FICA taxes are reported quarterly and reported quarterly on Form 941.

For federal unemployment taxes, you are required to remit annually unless your liability exceeds $500 at which time liability is due quarterly, reporting is due annually regardless of remittance frequency, and they are reported on Form 940.

Typically you’ll also need to report annual wages for employees using Form W-2 and for contractors using another form, Form 1099-MISC. And if you fail to provide information returns to your employees and your non-employees, then you could face IRS penalties.

Reasons that people forget

There's a lot of reasons that you might forget to pay your payroll taxes.

The first is that you may forget to withhold taxes in the first place, and hence don't have the money to then make a deposit to the government. Or, you may withhold them but forget to deposit them on the right schedule - or at all.

The worst circumstance are likely that you have bad cash flow and decide to borrow from your payroll tax funds -- and then don't have enough money to deposit.

But, in another possibility, if you've been actively working to evade taxes, we can't help you there. You should consult an accountant - and a lawyer - right away.

Penalties and Consequences

What’s important to know is that, regardless of the reasons, there are major penalties and you can even be held personally liable for failing to withhold employee pay in order to submit payroll taxes.

On the topic of personal liability, Section 6672 of the Internal Revenue Code allows the agency to charge a responsible party up to 100 percent personal liability.

Some of the financial penalties are quite severe, including the Failure to File the Form 941, which includes increasing penalties from 2% up to 15% of the total amount owed to the IRS. You also may pay interest of up to 6% on the money owed.

Another significant penalty is for job misclassification, such as considering workers to be independent contractors instead of employees. If you have paid people as contractors but haven’t withheld federal income or FICA taxes on the income, the IRS could give you a significant fine, and potentially further penalties.

More penalties are summarized here via Reuters, or in detail in the IRS Employer’s Tax Guide.

There are also other criteria to assess how severe the penalties you might face are, including:

  • Company size: large companies (particularly of over $5M in revenue) may pay more
  • Delay of payment: longer delays to pay mean higher penalties
  • The type of infraction: if you don't file taxes vs. forget an administrative task, you'll face quite different penalties

Consequences and collection

If you fail to pay the debt on your taxes, you could subsequently face what is called a "tax lien", which is a claim against your property. It's almost like taking collateral.

And if you want to understand further what it's like to end up in IRS Collection, there's a full document here with the details.

If the action is to willfully evade taxes, you could also face criminal charges, depending on the severity of the case.

Note: If you have issues with trust fund taxes, please see this article here which has some examples.

Now the important part - what should you do?

So now that you're very aware of the problems at hand and know what the penalties are, what are your options to fix this issue?

Solve the immediate problem

To fix the issue before you, now, there are two things that you should do right away (thanks to Chron for the tips):

  1. Appeal for a waiver: If you have received an IRS notice for a late payment or other penalty, you should consider contacting them. But you will need a very good reason. So if you do get in touch, explain why you think you deserve to have the penalty waived. If you're a small business, use that to your advantage, and explain to them that with so much going on, you just forgot or have come on hard times. They might give you a pass.
  2. PAY! ASAP. Of course, even if you're asking them to waive penalties, you need to pay the money itself. You should send a Form 941 to the address listed on the form. And to deposit the taxes, you should use the Electronic Federal Tax Payment System (EFTPS). If you don't already have an account with them, you can create one online here and go to Enroll. To sign up, you'll need to supply information about your business as well as your employer identification number and your bank account details. From there, the IRS will get back to you soon and give you details to login. Once you're logged in, go to Make a Payment. Send off your payment and make sure to write down the confirmation number that you get from the system.

And if you can't get your penalties waived, then you can also pay them using EFTPS, referring to the amounts listed in your IRS bill/notice.

Plan for the future

So, now that you've handled your immediate problem, it's time to ensure this doesn't happen again.

Withhold taxes and don't take from them

First off, make sure that you withhold the right taxes in the first place - and then don't touch them. Set them aside and consider them sacred, even if cash flow is bad. It's better for your business to go under or have to let someone go - or sell something - than to be in trouble with the government. Let alone, be held personally liable for all this.

Pay on time

Next up, pay on time. Make sure that you deposit on time. If your business owed less than $50,000 in taxes for the previous four quarters, then you only need to file monthly. If you reported more than $50,000 in tax liability, then you must deposit semi-weekly. Depending on your pay day, you'll know when to deposit. If your pay day is between a Wednesday-Friday, then you need to pay your taxes by the following Wednesday. Or if it's on the weekend or a Monday or a Tuesday, then make sure you pay the money by the next Friday.

Make it easier - use software

The bottom line is that… you're running a business. And it's hard work. Do you really want to be wasting your time with all this administration and busy work, worrying about dates and when and what to file? Not really.

So it's in your interest to look at software that could help you speed up and even automatically do a lot of this for you. There's even great payroll software options like Wave which are definitely worth a try. Who knows - they might really save you down the line.

That being said, hopefully this article didn't scare you about the penalties. The truth is this kind of thing happens to many small business owners, and we put this together to help you out of a potentially stressful but all too common situation. So don't feel bad. Just deal with it. But then make plans to have a future where you don't have to stress about payroll.

If you can take care of payroll faster, and reliably, you can stay focussed on your business.

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