All potential, new, and existing business owners that hire employees or are thinking about hiring employees, pay close attention!
When it comes to payroll taxes, we will offer up the options for solutions first. Then we’ll go into the good, the bad and the ugly of what’s involved. Again, this applies once a business owner decides to hire employees, not independent contractors or if the owner is the only one working for the company.
Business owners should not look to skip out on their payroll tax responsibilities by classifying an employee as an independent contractor. The IRS and Department of Labor watch for this practice and will impose penalties, fines and back taxes if it is done improperly, potentially shutting down the business and resulting in significant tax liabilities.
So, the solution first: Business owners should work with either a strong and reputable payroll company, accounting firm, bookkeeper or internal employee when it comes to payroll tax processing. They should pay for it, it’s critically worth it. If they can’t, they may not be able to hire that employee. If they do it themselves, they better get it right.
Why? Business owners need to make sure that not only are the payroll taxes taken out of employee paychecks but that they are accurately accounted for, reported on (IRS form 941) and paid to the IRS on time. Not doing so could potentially shut down the business and potentially lead to the owner going to jail.
In the eyes of the IRS, the conditions that could lead to penalties, interest, or criminal charges are:
- Failure to file
- Failure to deposit and
- Failure to pay.
All are in certain circumstances considered federally criminal by the IRS.
Again, hiring employees places an added responsibility of paying payroll taxes on business owners. Once an employee is hired and paid, the owner is responsible for withholding, reporting on and paying the following taxes for their employees and the business to the IRS and Department of Labor:
- Federal income tax withholdings
- State income tax withholdings (in most states)
- Local income tax withholdings (in certain areas)
- Social Security withholdings
- Medicare withholdings
- Federal Unemployment tax withholdings
Again, it’s the withholding, reporting and timely payment of these funds that are critical in the eyes of the IRS. They view this as their money that you as the business owner are processing and sending to them. You are, in their eyes, a trustee of IRS funds. And they want their money fairly quickly so any delays should be avoided at all costs.
And in many cases that’s where the challenge comes in for many business owners. Especially those that are cash strapped. The temptation for those firms may be to use the funds for any number of other business operating needs.
When a business does that they are opening up a can of worms. Again, it’s the IRS’ money. It’s against the law to use it for anything other than for what it’s meant. Therefore, having a process in place to set aside the fund on a frequent basis is critical to compliance.
If for some reason businesses can’t meet the needs of a payroll process they should consider reducing hours worked or even staff. While doing that may be difficult in the short to medium term it may help a potentially reduce a cascading tax obligation.
If an owner finds themself behind on processing and paying back payroll taxes they need to act quickly to resolve it. The worst thing they could do would be to ignore the issue. They may need the assistance of a third party to help resolve it but they do want to be proactive in coming to a resolution to this potential ruinous scenario.
So again, business want to be very vigilant in processing payroll taxes. Doing it correctly could be the difference between keeping the business and losing the business tacked on to a large tax liability.
It’s Founder, Kolonji Murray, has worked as a banker, accountant and financial advisor for a number of leading firms. He holds a degree in Accounting from Hampton University and is active in a number of civic and industry organizations. Along with being an Accountant Mr. Murray is Series 7 and 66 licensed in NY. He is also life, accident and health, variable life/variable annuities insurance licensed.