When you run your own business, you wear a great many hats. You find that you have responsibilities that you didn’t anticipate, and find yourself spread pretty thin. It is therefore critical for new business owners to learn to prioritize their responsibilities and to discover and develop systems to operate efficiently. One of the duties that you should place at the top of your priority list is to ensure compliance with the IRS when it comes to employee payroll taxes.
What Payroll Taxes Do I Have to Pay?
Payroll taxes are taxes that a business is legally obligated to withhold from what it pays its’ employees, as well as certain taxes that a business is obligated to match and pay. There are several categories of these taxes.
- Federal Income Tax — An employer is required to withhold and deposit federal income taxes from employees’ wages. A business should withhold wages in accordance with an employee’s W-4 Form and the IRS’s withholding tables.
- State Income Tax — If you withhold an employee’s federal income taxes, you are also responsible for withholding the employee’s Illinois state income tax for wages, lottery winnings, and other sources of income, such as dividends and interest. The amount withheld should be based on the Illinois income tax rates.
- Social Security and Medicare Taxes — Referred to as “FICA” taxes, an employee’s Social Security and Medicare taxes are withheld and matched by the employer. These are also calculated based on an employee’s W-4 Form.
- Federal and State Unemployment Taxes — Employers, and not employees, are obligated to pay unemployment taxes.
- Self-Employment Taxes — This applies to sole proprietorships where people work for themselves. The SE tax covers Social Security and Medicare taxes that would have been withheld from the individual’s pay.
Penalties for Non-Compliance
As a business, you are legally mandated to accurately report, withhold, and timely deposit these employment taxes. Failure to do so violates the law, breaches your duty to your employees, will result in significant penalties. Further, if you are designated as a “responsible party” for your business within the IRS’s definition, you may be personal liable for penalties.
Penalties include the Trust Fund Recovery Penalty, which is imposed on businesses or individuals that “willfully fail” to withhold, report, or deposit employment taxes. The IRS is also entitled to penalties for failure to timely file payroll tax forms.
Significantly, a failure to comply with employer withholding laws welcomes unwanted IRS scrutiny of your business. This can be time consuming, expensive, and damaging to your business’s reputation.
Contact a Tax Attorney
Reporting, withholding, and depositing payroll taxes are an essential element of operating your own business. If you need tax advice and guidance to comply with the law, contact the Law Offices of Robert S. Thomas. The last thing you want is for your business to be liable for penalties, or worse, to be personally liable for noncompliance. I have a Master of Law Degree (LLM) in Taxation, and a license to practice in the United States Tax Court. Contact The Law Offices of Robert S. Thomas at 847-392-5893 to schedule a consultation or visit our website today.