Small business owners must deposit payroll taxes on a regular basis with the IRS using Electronic Federal Tax Payment System (EFTPS). Your schedule of deposits depends upon the amount of payroll taxes you accumulate. The IRS uses a look back system to decide. If your payroll tax liability is $50,000 or less during the look back period, you must deposit taxes by the 15th of the month following the month of the liability. If your total tax liability is greater than $50,000, taxes must be deposited on a semi-weekly schedule.
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To identify your look back period go to Publication 15.
Once you have your schedule, you must determine your liability. Include only payments made during the month, and exclude pay periods ending during the month with paydays in the subsequent month. Note that all taxes withheld and matching for paychecks prepared during the month of September are due on Oct. 15. Only include checks remitted during that month; the pay period ending date is not an issue. For example, the period ending date is Sept. 30 and payday is Oct. 5. Do not include any withholdings or matching taxes for that pay period in the September payroll.
If you are on the semi-weekly schedule, you must deposit payroll taxes each pay period. The due date of the deposit depends on the payday. If the pay day is Wednesday, Thursday, or Friday then you must deposit the tax liability by the following Wednesday. If your pay day is Saturday, Sunday, Monday, or Tuesday, you must deposit the taxes by the following Friday.
Banks no longer accept payroll tax deposits, they must be remitted online. To enroll at EFTPS, click here.
Not making deposits in a timely manner can result in substantial penalties. At one time or another almost every business owner has faced the decision of either turning over the payroll taxes to the government or paying rent. Invariably, the rent gets paid. Later when payroll tax liabilities mount to an insurmountable figure, panic sets in. Now the IRS is knocking at the door and they are not in a good mood.
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The IRS considers nonpayment of payroll tax liabilities a much more serious transgression than nonpayment of income taxes because it involves money that does not belong to the employer. The gross pay that you promise to an employee includes taxes that must be turned over to the government – federal and state withholding, state disability, FICA and Medicare. These monies are trust fund monies and belong rightfully to your employee.
If an employer fails to deposit these taxes and simply uses them for working capital, or worse, to take a lavish vacation, the government will penalize this employer possibly with a 100% civil penalty, plus interest. Ouch.
If you run into a financial pit so deep that you can’t deposit the payroll taxes, look for other ways to make the payment. If you can make a partial deposit, make sure you deposit the trust fund portion and worry about the employer share later on. This will help you avoid that 100% civil penalty.
And don’t think that an offer in compromise is going to save you. The IRS oftentimes accepts pennies on the dollar, but that’s usually in settlement of an income tax liability. They will consider a reduced offer toward payroll tax liabilities if the company is out of business. The civil penalty is usually levied against the individuals responsible for turning over the funds. This can be you, your bookkeeper or other employee. Because the civil penalty is levied at the individual level, you would have to seek an offer in compromise at that level. The offer must be based either on doubt as to liability or because you are suffering a hardship and likely have no ability to repay.
Consideration of offers for payroll tax liabilities are not considered under the IRS’ new Fresh Start Program.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.