Payroll is an important part of your business but running payroll in house can be a risky endeavor. The main message here is to be careful and to make sure that you know what you are doing. Here are 4 things to keep a look out for if you should choose to run payroll for yourself.
The IRS is focusing increased tax compliance efforts on small businesses so it is important to know the common payroll tax audit triggers and learn how to avoid severe IRS penalties. Small business owners have been identified by the IRS as the largest source of uncollected taxes. Small businesses are the most likely target of increased tax compliance enforcement. Because small business owners are known to be tax evaders, the IRS tends to focus their enforcement efforts on small businesses.
Payroll tax penalties can add up quickly and create enormous tax debt. The penalties assessed on delinquent payroll tax deposits or filings can dramatically increase your total tax bill. There are three main penalties you can be hit with (failure to file, failure to deposit, and the failure to pay), which can add up to about 33% plus interest. Sec. 6672(a) provides that “any person required to collect, truthfully account for, and pay over any tax levied by” the Internal Revenue Code who willfully neglects to do so, will, “in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax … not collected … and paid over.” The term “any person” is important because Sec. 6672(a) allows the IRS to pierce the corporate veil and proceed against any person who is responsible for the corporation’s failure to pay over trust fund taxes, thereby making that person personally liable for the employer’s unpaid payroll taxes (White, 372 F.2d 513 (Ct. Cl. 1967)). Therefore, the penalty can be levied on any responsible person, regardless of the form of business entity.
Not filing or paying your payroll taxes is a federal crime. The IRS can refer your case to the Criminal Investigation Division and ultimately to the Department of Justice if they can prove that you intentionally (very low thresholds) didn’t file and/or pay. The trust fund recovery penalty can also be assessed against a corporate officer who neglects to pay over withheld taxes at the direction of a supervisor when sufficient funds are available. In some cases an officer who is aware of the delinquent taxes does not pay out of fear of losing their job. The danger of being fired by a supervisor for paying the taxes will not make the person less responsible.
Borrowing from payroll taxes is a crime. Many small and mid-size businesses use the money they collect from payroll taxes to pay their operating expenses because they have trouble with cash flow. The money collected from employees to pay their share of federal withheld tax, FICA and Medicare (Social Security) does not belong to the business. It belongs to the government and must be accounted for and paid to the government. Generally, one must make a federal tax deposit (by tax filing service, phone, or in person at a bank) 3 days after the pay date of the pay roll checks (you have longer with smaller payrolls).
The IRS can come after business owners individually for payroll taxes owed. The IRS can access what is called the Trust Fund Recovery Penalty (TFRP) against owners and shareholders. The IRS is the only entity that can pierce the corporate veil and go after individuals.
Running your own payroll can cause you to lose precious time, lose money and resources, lose the trust the other have in you and your organization, and could potentially cause you to lose your business.
“Responsible persons” have an obligation to collect and pay payroll taxes or suffer the consequences
Both the courts and the IRS have defined “responsible person” broadly to include business owners and employees
Before the 100% trust fund penalty can be imposed, however, in addition to being a responsible person, that person must also be found to have willfully failed to pay the tax
The IRS is aggressive in collecting these taxes. In a number of cases where taxpayers have behaved egregiously, it has also pursued criminal prosecutions that landed offenders in jail