Payroll Tax Issues – File Old Tax Returns

What is the IRS Trust Fund Recovery Penalty?

When you pay your employees, you don’t pay them all the money they earned. The federal income tax and employees’ share of social security and Medicare taxes that you withhold from your employees’ paychecks are part of their wages that you pay to the U.S. Treasury instead of to your employees. Your employees “trust” that you will pay the withheld taxes to the U.S. Treasury by making federal tax deposits. This is the reason that these withheld taxes are called “trust fund taxes.”

If federal income, social security, or Medicare taxes that must be withheld aren’t either 1) withheld or 2) deposited or paid to the U.S. Treasury, the government can charge a very serious penalty called the Trust Fund Recovery Penalty (TFRP). If you are looking at an IRS Account Transcript for your SSN (or a tax lien), you may see notations for Civil Penalty, CIV-PEN, or 6672 Penalty. To get a better understanding of trust-fund taxes, you should also understand non-trust fund taxes.

What Are Non-Trust Fund Taxes?

Employers must match their employees’ Social Security and Medicare contributions. Those matching amounts are considered non-trust fund taxes. The IRS typically only holds a business responsible for non-trust fund taxes if they aren’t paid to the government. It does not hold individuals responsible. However, the exact liability rules depend on your business structure. If the business is “self-employed” or the sole principal of an LLC, a person may be held personally responsible for both trust-fund and non-trust fund taxes.

How Much Is the Trust Fund Recovery Penalty Amount?

The Tax Fund Recovery Penalty is not small. In fact, it is equal to 100% of the amount of taxes that were unpaid. Once again, that includes any income taxes withheld from an employee’s paycheck plus the employee’s Social Security and Medicare contributions. Note that Social Security and Medicare contributions are also referred to as FICA (Federal Insurance Contributions Act) taxes.

To illustrate, let’s say you paid an employee $2,000. You noted on the paycheck stub that you withheld $200 for income tax plus $124 for Social Security and $29 for Medicare. However, you didn’t send any of that money to the IRS. In that case, the unpaid tax bill is $353. You owe that amount plus that amount again as a penalty. That effectively doubles your bill!

Who Can Be Responsible for the TFRP?

If these unpaid taxes can’t be immediately collected from the employer or business, the TFRP may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, or paying over these taxes, and who acted “willfully” in not doing so. That includes owners, CEOs, and directors, but it can also include employees, third party payroll administrators, outside accountants, and bookkeepers.

To establish responsibility, the IRS has to prove two things. First, that the individual in question was responsible for remitting the taxes (i.e. the responsible party). Second, the individual must aware that the taxes were due and purposefully or willfully ignored the law (i.e. willfulness). For example, if you or someone related to your organization took the money set outside for payroll and income taxes and used it to pay another bill, that’s a clear sign of willfulness.

How does the IRS Assess a TFRP?

If the IRS believes that a company hasn’t been paying its trust fund taxes, a Revenue Officer from the IRS starts an assessment to identify the responsible party. As part of that process, the IRS requests multiple documents and lots of information from the company. This documentation includes bank statements and canceled checks, but it also includes details about who has passwords for online accounts and who knows PINs for bank cards. Basically, the IRS wants to see who’s paying the bills, who’s controlling the money, and where the money is going. They will also want to conduct an interview known as a 4180 interview (which is based on IRS-Form-4180).

Once the IRS identifies who was responsible and willful, they will assess the penalty.

What Forms Are Involved in the TFRP?

If the IRS thinks you are responsible, you will receive Letter 1153. This is the notice the IRS sends when the business has refused to pay the payroll taxes, and the IRS has decided to hold an individual personally responsible for the debt. Accompanying this letter is Form 2751.

Signing Form 2751 is an admission that a person is responsible for the unpaid payroll tax. Once the form is signed, it is almost impossible to reverse it. The only way to change the admission is to hire an attorney who can argue that you were coerced into signing. As such, if a person doesn’t agree with the letter, then it is not advised to Form 2751. The notice gives you 60 days to appeal, and to do so, you need to prove that you were not responsible for the unpaid tax debt.

What Is the Statute of Limitations on the TFRP?

If the IRS assesses a penalty, it has up to 10 years to collect it. During that time, if you have not made arrangements to settle/pay the penalties, then you can be subject to “enforced collections” (i.e. the IRS attempting to seize assets, garnish wages, offset refunds, etc.).

However, the IRS only has 3 years to assess the penalty. This clock starts ticking on April 15 after the year the trust fund taxes were due to be filed. For instance, let’s say a company was supposed to pay some trust fund taxes in October 2019. The IRS has three years from April 15, 2020 to assess the penalty. If the IRS doesn’t do anything by April 14, 2023, it can’t do anything after that date.

How Can You Settle the Penalty?

Like other types of tax debt, there are options to pay this penalty. If you don’t have the full payment, you can apply for a payment plan (a.k.a installment agreement). Alternatively, you can try to settle the debt for less than you owe through the offer in compromise program or through a partial payment installment agreement.

The important thing to note is that you should contact the IRS and set up an arrangement before the IRS tries to garnish your wages or seize your assets. It is also important to note that these penalties can not be discharged in bankruptcy.

Need help with your payroll tax problems?

If you have unpaid payroll taxes, have been assessed the TFRP, need a payroll provider to help you get back on track or just have tax debt in general, we can help! Simply click this link to our parent company site and complete the form at the bottom, shoot us an email via the address in the footer or give us a call.

In doing so, we’ll send you our FREE special report entitled 5 Questions To Ask Any Tax Resolution Firm Before Paying Them A Dime, a comprehensive 30-minute Tax Debt Settlement Analysis AND your personalized Tax Resolution Plan (a package valued at $175, but FREE to you for a limited time).

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5 Payroll Essentials Every Employer Should Know

Once you’ve hired your first employee, then you must make sure they get paid right? Well, we’ve seen some of the mistakes that employers typically make when they first start running payroll. This post will talk about the most important elements of processing payroll so that you don’t wind up in trouble.

Understand the labor laws.

As an employer, you must adhere to the federal, state, and local labor and employment laws. The federal Fair Labor Standards Act (FLSA) establishes rules for the minimum wage, premium pay for overtime, and protections for children who work. All employers should be aware of FLSA requirements as well as state and local wage and hour laws. One thing to be aware of is that they sometimes appear to contradict one another. For example, the federal minimum wage is $7.25, it’s $8.25 in Illinois and starting July 1, 2019 it will be $13.00 in Chicago. As such, you must always follow the provisions that are most favorable to your employees (i.e., pay $13 per hour if you’re located in Chicago). Most states have informative websites to help you figure out which laws apply. It’s a good idea to start there and then talk with a professional to make sure you’re following the right set of laws.

Establish your pay schedule.

Once your pay rates are determined to be in accordance with the laws, you then have to figure out how often to pay your employees. The beginning and ending dates of this schedule is referred to as your pay period, which represents the period in which your staff logged work time or earned wages. Pay periods typically include weekly, biweekly, semi-monthly and monthly. The “payday” is the actual date on which employees are paid. It’s usually a fixed number of days after the end of the pay period.

Withholding payroll taxes.

When it comes to payroll taxes, there are two parties, who are required to pay taxes on wages. This would be the employee and employer. These taxes are usually owed to both the federal government and the state, and in some cases to cities and municipalities as well. This post discusses in detail what some of those taxes are and your responsibilities. However, an employer is generally responsible for collecting federal income tax, Social Security, and Medicare tax from employees’ paychecks based on what employees marked in their Form W-4. The employer must then also pay a matching amount of Social Security and Medicare tax as well as Federal Unemployment Tax (FUTA).

Remitting taxes collected and filing the appropriate tax returns.

As an employer, it is your responsibility to deposit federal income tax withheld for your employees pay as well as both the employer and employee portions of social security and Medicare taxes. However when are you to make the deposits and how do you make them? Also, what are the penalties for making deposits late? This post will give you all the pertinent details.

Now for filings. Paying the taxes is one thing, but you must also file the corresponding returns. If you don’t, then the taxing authorities can’t properly match the deposits with other needed information. Federal Form 941 (quarterly federal tax return) must be filed each quarter, and Form 940 (FUTA tax return) must be filed yearly. You may also have to file similar forms for your state. Employers are also required to send Forms W-2 and W-3 to the Social Security Administration (SSA) each year. Most payroll services will handle these filings for you. If you do them yourself, read more about these forms here.

Keep good records.

As an employer, you must keep track of hours worked for hourly, nonexempt employees. Most workers are classified as either exempt or nonexempt depending on their salary and the type of work they do. You can read about these and other classifications in the FLSA and your state’s wage and hour laws. You can learn more about the timekeeping requirements by reviewing this fact sheet from the Department of Labor .

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The IRS uses information reported on Form W-2 to identify employees with potential withholding compliance problems. What this means is that if a taxpayer chronically claims too many withholding allowances, and generates significant tax balances when they file their return, the IRS may “flag” them. In some cases, if a serious under withholding problem is found to exist for a particular employee, the IRS may issue a lock-in letter to the employer.

How employees get in trouble. While rare, some employees may actually qualify to be “exempt” from having federal income tax withheld from their checks. Unfortunately, most people who indicate to their employer that they are exempt from withholding, usually do so based upon the poor advice of fellow employees, friends or family members.

Form W-4, Employee’s Withholding Allowance Certificate, is used to indicate to your employer how much federal income tax you would like withheld from your paychecks. The greater the number on the W-4, the smaller the amount of taxes they will withhold. If you claim to be exempt, then no federal income taxes are taken out.

Steps the IRS will take. If the IRS does not think an employee should be exempt (or is withholding too little) they may send them a 2802C Letter. This is basically a “warning” letter to tell you that you need to self-correct the matter before the IRS acts. One way to do this is to use the IRS Withholding Calculator to ensure you are claiming the correct number of allowances.

If you don’t make changes, then the IRS will send you (and your employer) a 2801C Letter. This letter basically states that the IRS has determined that you’re not entitled to claim exempt status. You will be given a telephone number to call the IRS within 60 days for a modification. After that date, your employer must withhold income tax from your wages at a single rate with zero allowances. Once a lock-in rate is effective, an employer can not decrease withholding unless approved by the IRS.

Can a lock in letter decision be reversed? The short answer is yes. Here are the steps that one would take:

Call the IRS at 855-839-2235 within 30 days from the date of the letter.
When you call, have the following information available:
- Form W-4 and worksheets. (You must complete the “Two Earners Multiple Jobs Worksheet” on the back of the Form W-4, if you have more than one job or your spouse works.)
- Most current pay stubs for all jobs.
- Number of withholding allowances you (and your spouse) are claiming on your Form(s) W-4.
- The social security number and date of birth for any dependent you are entitled to claim.
- A copy of the current tax return due, including all schedules, forms, and attachments.

The IRS will then consider your explanation of why you believe you are entitled to a different withholding rate or number of withholding allowances (or exempt status). If they agree with the information provided, then the lock in letter will be reversed.

Are you receiving letters from the IRS? If so, just know that help is available. Feel free to give us a call and we can discuss your situation. Whether it is adjusting your withholding, filing those unfiled tax returns or dealing with an outstanding tax debt, we can help you address the matter and put it behind you!

Payroll Taxes and Employer Responsibilities

As an employer, understanding the obligations associated with running payroll can be a little daunting. In this post we will explain what taxes you are responsible for, the returns that need to be filed as well as the associated deadlines.

What are taxes am I responsible for? An employer’s federal payroll tax responsibilities include withholding income taxes from an employee’s compensation and paying their Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). FICA is comprised of the following taxes:

6.2 percent Social Security tax;
1.45 percent Medicare tax (the “regular” Medicare tax); and
Since 2013, a 0.9 percent Medicare surtax when the employee earns over $200,000.

You must withhold these amounts from an employee’s wages. The law also requires you to pay the employer’s portion of two of these taxes:

6.2 percent Social Security tax
1.45 percent Medicare tax (the “regular” Medicare tax).

What other things am I responsible for? The following checklist list provides a brief summary of your basic responsibilities. Because the individual circumstances for each employer can vary greatly, responsibilities for withholding, depositing, and reporting employment taxes can differ.

New Employees:

Verify work eligibility of new employees
Record employees’ names and SSNs from social security cards
Ask employees for Form W-4

Each Payday:

Withhold federal income tax based on each employee’s Form W-4
Withhold employee’s share of social security and Medicare taxes
Deposit:
- Withheld income tax
- Withheld and employer social security taxes
- Withheld and employer Medicare taxes

Note: Due date of deposit generally depends on your deposit schedule (monthly or semiweekly). For more information on deposit schedules, see the following blog post.

Quarterly (By April 30, July 31, October 31, File Form 940 and January 31):

Deposit FUTA tax if undeposited amount is over $500
File Form 941 (pay tax with return if not required to deposit)

Annually (see below for due dates):

File Form 940
File Form 944 if required (pay tax with return if not required to deposit)
Reconcile Forms 941 (or Form 944) with Forms W-2 and W-3
Furnish each employee a Form W-2
File Copy A of Forms W-2 and the transmittal Form W-3 with the SSA
Furnish each other payee a Form 1099 (for example, Form 1099-MISC)
File Forms 1099 and the transmittal Form 1096
File Form 945 for any nonpayroll income tax withholding
Remind employees to submit a new Form W-4 if they need to change their withholding
Ask for a new Form W-4 from employees claiming exemption from income tax withholding

What are the due dates? The following calendar will tell you what items are due to be filed and their associated deadlines.

By January 31
File Form 941 or Form 944. File Form 941 for the fourth quarter of the previous calendar year and deposit any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 941 if your total tax liability for the quarter is less than $2,500. File Form 944 for the previous calendar year instead of Form 941 if the IRS has notified you in writing to file Form 944 and pay any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 944 if your total tax liability for the year is less than $2,500.

File Form 940. File Form 940 to report any FUTA tax.

Furnish Forms 1099 and W-2. Furnish each employee a completed Form W-2. Furnish Form 1099-MISC to payees for nonemployee compensation.

File Form W-2. File with the SSA Copy A of all paper and electronic Forms W-2 with Form W-3, Transmittal of Wage and Tax Statements. For more information on reporting Form W-2 information to the SSA electronically, visit the SSA’s Employer W-2 Filing Instructions & Information webpage. If filing electronically, via the SSA’s Form W-2 Online service, the SSA will generate Form W-3 data from the electronic submission of Form(s) W-2.

File Form 1099-MISC reporting nonemployee compensation. File with the IRS Copy A of all paper and electronic Forms 1099-MISC that report nonemployee compensation, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns.

File Form 945. File Form 945 to report any nonpayroll federal income tax withheld.

By February 28
Request a new Form W-4 from exempt employees. Ask for a new Form W-4 from each employee who claimed exemption from income tax withholding last year.

File paper Forms 1099 and 1096. File Copy A of all paper Forms 1099, except Forms 1099-MISC reporting nonemployee compensation, with Form 1096 with the IRS.

File paper Form 8027. File paper Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, with the IRS.

On March 1
Forms W-4 claiming exemption from withholding expire. Any Form W-4 claiming exemption from withholding for the previous year has now expired. Begin withholding for any employee who previously claimed exemption from withholding but hasn’t given you a new Form W-4 for the current year. If the employee doesn’t give you a new Form W-4, withhold tax based on the last valid Form W-4 you have for the employee that doesn’t claim exemption from withholding or, if one doesn’t exist, as if he or she is single with zero withholding allowances. If the employee gives you a new Form W-4 claiming exemption from withholding after February 28, you may apply the exemption to future wages, but don’t refund taxes withheld while the exempt status wasn’t in place.

By March 31
File electronic Forms 1099 and 8027. File electronic Forms 1099, except Forms 1099-MISC reporting nonemployee compensation, and 8027 with the IRS.

By April 30, July 31, October 31, and January 31
Deposit FUTA taxes. Deposit FUTA tax for the quarter (including any amount carried over from other quarters) if over $500. If $500 or less, carry it over to the next quarter.

File Form 941. File Form 941 and deposit any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 941 if your total tax liability for the quarter is less than $2,500. Don’t file Form 941 for these quarters if you have been notified to file Form 944 and you didn’t request and receive written notice from the IRS to file quarterly Forms 941.

Before December 1
New Forms W-4. Remind employees to submit a new Form W-4 if their marital status or withholding allowances have changed or will change for the next year.

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How To Get Caught Up On Payroll Taxes

Sometimes a business will fall behind on paying their payroll taxes to the IRS, the State Department of Revenue or both. This can happen due to software issues (i.e. believing things are being filed when they are not) or some other reason. However, a more common reason is when business owners experience tight cash flow periods and decide to stop paying their payroll taxes.

If you are reading this post and find yourself in the position of owing back payroll taxes, we encourage you to heed this advice:

Read this post in it’s entirety, and IMMEDIATELY do something productive to deal with your matter. Don’t schedule time to work on it later; do it NOW. Our point is that in order to successfully solve your problem, you MUST confront it. So, make a phone call to the state, put funds aside for a payment toward your unpaid balance, complete one of the missing returns, and put it in an envelope to mail with a stamp on it, etc. Just DO something, right now.

Consequences when you don’t file or pay your payroll taxes
Here are some things you can expect to happen when you don’t file or pay:

Penalties – If the payroll tax return is filed late, the IRS will fine you a percentage of the balance of the return once it is eventually filed. Once the return(s) is filed, if you haven’t paid the associated taxes, the IRS will impose a penalty for not paying within the time frame listed on the notices they sent you. This post on how to deposit payroll taxes will outline how some of the penalties are calculated.
Interest – The IRS will charge the business interest on all unpaid balances and unpaid penalties until they are paid in full.
Tax lien – If you owe enough, the IRS will eventually file a tax lien to protect the US Government’s interest. This basically means that the IRS gets first dibs on your assets if you try and sell the business or file bankruptcy. This is done as a procedural matter, even if you get your act together and set up a payment plan.
Tax levy – If the business is seriously behind and has been avoiding the IRS, they could a random day of the week, take a look at your bank account and seize what you owe them. This is one reason why avoiding the problem is NOT a good idea when it comes to payroll tax problems.
State issues – In addition to what the IRS can do, your state can do that and more. Because LLCs and corporations are regulated at the state level, the state has a few more weapons in its arsenal. They can dissolve your LLC or corporation, deny your operating licenses, and in extreme cases, show up at your place of business and physically shut it down.

How to fix the problem
Here are the steps that one will want to take to address the problem once and for all:

Don’t Ignore It – The IRS taxes payroll tax issues VERY seriously. Why? Because the taxes that you are supposed to send to them are held in “trust” for your employees. What we mean is that your employees “trusted” you do send them to the IRS. So when you don’t, the IRS gets really mad and will come after you harder/faster than if it was just an income tax matter. So if you want your life to stay headache free, deal with this issue now!
File any unfiled returns and make current deposits – File all unfiled returns with the IRS and your state tax authorities ASAP. Also make sure that you are making your current deposits on time. It goes a long way when you eventually talk to someone at the IRS and they can see that you are paid up on your current returns and are just dealing with older returns/balances.
Follow the IRS Deadlines – When the IRS gives you deadlines for completing returns, submitting documentation, making payments, and other matters, it is critical that you do not ignore these dates. Failing to comply with the deadlines could put your business in jeopardy of being shuttered and you being heavily fined. To protect valuables like company equipment or accounts receivable, you should abide by the deadlines the IRS gives you.
Be prepared to complete IRS Form 433-B – IRS Form 433-B is used to obtain current financial information necessary for determining how a business can satisfy an outstanding tax liability. With that said, you should familiarize yourself with the form as the IRS will probably ask for it once you start to correspond with them.
Set up an installment agreement – Once the Form 433-B is completed, it will indicate how much money the business has left to pay towards the taxes it owes. At that point it’s just a matter of reaching out to the IRS (call or write them) and setting up the payment plan. Now we’re sure that some of you will ask “but what about applying for an offer in compromise?” Well, just know that if your business is still in operation, an OIC will more than likely NOT happen (the IRS doesn’t like to cut “forgiveness” deals with operating businesses).

Do You Have Payroll Tax Issues?
Have you failed to file payroll tax returns, make payroll tax deposits or received an IRS notice that you don’t know how (or want) to deal with? Give us a call at 844-829-3788 NOW to put us to work for you. We can help you resolve your payroll tax matters so you can get back to running your business.

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Depositing Payroll Taxes

When To Deposit
There are two schedules for determining when you deposit payroll taxes. These schedules (monthly and semi-weekly) tell you when a deposit is due after a tax liability arises (for example, when you have a payday). The deposit schedule you must use is based on the total tax liability you reported on IRS Form 941 during what is known as the lookback period. Your deposit schedule isn’t determined by how often you pay your employees.

So what is the lookback period? If you’re a Form 941 filer, your deposit schedule for a calendar year is determined from the total taxes reported on Forms 941, line 10 (line 12 for quarters beginning after December 31, 2016), in a 4-quarter lookback period. The lookback period begins July 1st and ends June 30th. If you reported $50,000 or less of taxes for the lookback period, you’re a monthly schedule depositor; if you reported more than $50,000, you’re a semiweekly schedule depositor.

For example, the following would be the lookback period for calendar year 2019:

July 1, 2017 – September 30, 2017
October 1, 2017 – December 31, 2017
January 1, 2018 – March 31, 2018
April 1, 2018 – June 30, 2018

Now what if you are a new employer? Your tax liability for any quarter in the lookback period before you started or acquired your business is considered to be zero. Therefore, you’re a monthly schedule depositor for the first calendar year of your business.

Monthly Deposit Schedule
Under the monthly deposit schedule, an employer deposits employment taxes for payroll made during a month by the 15th day of the following month. So for example, the payroll taxes for you August payroll would need to be deposited by September 15th.

Semiweekly Deposit Schedule
Under the semiweekly deposit schedule, deposit employment taxes for payrolls processed on Wednesday, Thursday, and/or Friday by the following Wednesday. Deposit taxes for payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday.

How To Deposit
You must use the Electronic Federal Tax Payment System (EFTPS) to make your deposits. If you don’t want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make the deposits on your behalf. FTPS is a free service provided by the Department of Treasury. To get more information about EFTPS or to enroll, you can visit the EFTPS website or call 1-800-555-4477.

If you’re a new employer that indicated you might have payroll tax liabilities when you requested an EIN, you’ll be pre-enrolled in EFTPS. You’ll receive information about Express Enrollment in your Employer Identification Number (EIN) Package and an additional mailing containing your EFTPS personal identification number (PIN) and instructions for activating your PIN. Call the toll-free number located in your “How to Activate Your Enrollment” brochure to activate your enrollment and begin making your payroll tax deposits. If you outsource any of your payroll and related tax duties to a third party payer, such as a PSP or reporting agent, be sure to tell them about your EFTPS enrollment.

Deposit Penalties
If you don’t make required deposits on time or if you make deposits for less than the required amount, you might be subject to penalties. The penalties don’t apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect. If you receive a penalty notice, you can provide an explanation of why you believe reasonable cause exists.

For amounts not properly or timely deposited, the following penalty rates apply:

2% – Deposits made 1 to 5 days late.
5% – Deposits made 6 to 15 days late.
10% – Deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due.
10% – Amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return.
15% – Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.

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