Payroll Tax Penalties

As an employer, you’re responsible for making sure the appropriate amount of money is withheld from your employees’ paychecks and paid to the IRS for federal income tax as well as Federal Insurance Contributions Act (FICA) taxes, which comprise Social Security and Medicare. Even if your employee opts for zero income-tax withholdings, you’re still responsible for paying that employee’s portion of FICA taxes.

Consult with your HR department or PEO to ensure that you’re properly reporting your income and FICA tax withholdings on a quarterly basis via Form 941, the Employer’s Quarterly Federal Tax Requirements. (Employers are also responsible for reporting and contributing to the Federal Unemployment Tax Act [FUTA], Form 940, on an annual basis.) The withheld funds must be deposited into a financial institution that meets Federal Tax Deposit Requirements. (See the IRS’s website for more information on employer and employee tax withholding responsibilities.)

Failure to accurately report, withhold and pay payroll taxes can have serious consequences—not just for your company, but for you as an individual. The IRS can levy financial recovery penalties as well as criminal charges for employment tax nonpayment. If the Justice Department decides to prosecute and you’re found guilty of willful noncompliance with regard to employment taxes, you can be punished by a fine of up to $10,000 and up to five years in prison.

In many cases, however, payroll tax evasion comes down to some form of negligence or ignorance. Still, the consequences can take a major toll, both financially and emotionally.

Of course, you don’t want to put your company at risk of being cited by the IRS, but in the case of payroll tax mistakes, the penalties can be even more exacting: The IRS can and does find individuals within a guilty company responsible for payroll tax evasion. That means that a singular “responsible party” may not be the company as a whole, but the one person who signed off on the form. That one person may receive the entirety of the IRS’s punishment.

One individual can be held personally responsible for repayment of a company's unpaid payroll taxes.

In other words, the IRS looks to find a particular person within a company who is personally responsible for the payroll tax evasion. That “responsible party” can be held personally liable for “the trust fund recovery penalty,” making a single person responsible for the repayment of 100 percent of the unpaid tax.

You can fight the IRS on its “responsible party” findings, but even successful court cases take their strain on individuals and the company as a whole.

As with any tax-related issue, the easiest, cheapest and most-sound business practice is to make sure you’re doing it correctly in the first place. Take the time and rely on HR experts, tax consultants or your PEO to be sure that you’re withholding, reporting and paying the proper amount of payroll tax for each employee. Shortcuts aren’t worth it.