As an employer, you must pay employment taxes if you have employees.
Penalties
If you have employees, you absolutely must deduct and withhold various taxes from the paychecks of your employees. Since you are deducting money from the employee’s paycheck, you are handling their funds. This fact is very important to the IRS and it places great emphasis on any failure to deposit employment taxes.
If you fail to pay employment taxes, you will be subject to a 100 percent penalty. Yes, 100 percent. Known as the trust fund recovery penalty, the penalty is assessed against the person responsible for paying the taxes, not the entity. The person can be the owner, corporate officer or other responsible persons. In short, a business entity is not going to protect you from the wrath of the IRS.
Late Payments
Cash flow crunches are an inevitable event for practically every business. So, what happens if you make a late payment for employment taxes. Unless you can show a reasonable reason for the delay, the IRS is going to penalize you.
When You Will be Penalized
Late payment penalties range in amount depending on the delay. If the delay is less than six days, the penalty is two percent. Delay for six to 15 days and you are looking at five percent. More than 15 days in delay is going to push the penalty to 15 percent. If you delay this long, the IRS will be peppering you with penalty notices telling you where you stand.
payroll tax penalties are as follows according to the ADP website, https://www.adp.com/, copyright 2023:
One to five days late results in a 2% penalty. Six to 15 days late results in a 5% penalty. 16 days late or within 10 days of the first IRS notice results in a 10% penalty. 10 days after the first IRS notice results in a maximum penalty of 15%.
Late payment penalties range from 2-15%, depending on the delay
Take Aways
- Employers must deduct and withhold federal income tax, Social Security tax, and Medicare tax from W-2 employee paychecks. State and local taxes might also be required depending on your location.
- If a business does not pay these taxes, it can result in nasty penalties, including a 100% penalty assessed against the person responsible for paying the taxes. This could be the employer, the payroll company, or anyone responsible for collecting and remitting employment taxes.
- Penalties for late employment taxes can range from 2-15% depending on the length of delay.
It’s important to note that tax laws and penalties can vary by jurisdiction and circumstance. You may want consult with a tax professional for details based on your situation.
Here are some general guidelines:
Federal Income Tax:
Businesses are required to take out federal income tax from W-2 employees’ paychecks based on the employee’s W-4 form.
Social Security Tax:
Both Businesses and employees are required to contribute to Social Security tax. The current Social Security tax rate for 2023 is 6.2% for employees and 6.2% for employers, for a total of 12.4%. The tax is withheld from the employee’s paycheck, up to a maximum wage base of $147,000 for 2023. This contribution is important because it funds retirement, disability, and survivor benefits.
Medicare Tax:
Both Businesses and employees are required to contribute to Medicare tax; the current Medicare tax rate for 2023 is 1.45% for employees and 1.45% for employers, for a total of 2.9%. The tax is withheld from the employee’s paycheck, with no maximum wage base and funds healthcare benefits for seniors and certain individuals with disabilities.
State and Local Taxes:
Depending on your location, employers may also be required to withhold a variety of state and local taxes from their employees’ wages; which could include state income tax, state disability insurance tax, and local taxes like city or county taxes. Businesses should learn what taxes are required to be withheld and how to calculate the amounts.
To Calculate the Amount of Taxes Owed
It’s free to use the IRS tax withholding tables or the IRS withholding calculator. These tools provide the amount of federal income tax to withhold based on the employee’s income, filing status, and number of allowances.
Nevada man was sentenced November 30 to 13 years and three months in prison for filing false tax returns and other multiple fraud schemes
In Closing
Whatever you do, make sure you deposit employment taxes with the IRS in a timely fashion. Take a moment to think about the worst thing you have ever heard done by the IRS. If you fail to pay employment taxes, the actions taken by the IRS will be ten times worse and you will be the one telling horror stories; as seen in the case of the Nevada man who was sentenced to prison for filing false tax returns and other multiple fraud schemes.
Q & A
What is the “trust fund recovery penalty”?
This is a penalty of 100% assessed against the person responsible for paying the taxes, not the entity; it can be assessed against the owner, corporate officer, or other “responsible person” who fails to deposit employment taxes.
What are the current Social Security and Medicare tax rates for 2023?
The Social Security tax rate for 2023 is 6.2% which is matched by both the employee and the employer. The Medicare tax rate for 2023 is 1.45% respectively. This = a total tax rate of 12.4% for Social Security and 2.9% for Medicare.
What taxes have to be deducted from employees’ paychecks?
Employers have to deduct and hold back federal income tax, Social Security tax, and Medicare tax from W-2 employee paychecks. Depending on the business’s location, state and local taxes may also be required.
Do I have to pay employment taxes if I’m self-employed?
Yes, self-employed individuals are also responsible for paying taxes. This includes both the employer and employee portion of Social Security and Medicare taxes, known as self-employment taxes.