Check out our comprehensive employer's guide to payroll taxes - a structured and simple overview of what employers need to know about the taxes that flow through payroll - on both the employer and employee side.
Today, we're skipping right past the part about how everyone - whether an individual or business tax filer - always wants to minimize their tax burden and getting right to an important fact. There are many ways the IRS can (and likely will) penalize a business for not paying payroll taxes.
The Internal Revenue Service (IRS) in reality can do just about anything to collect delinquent payroll taxes. Here are the 5 most common payroll tax penalties imposed by the IRS...
Raise your borrowing costs
The IRS can put a lien on your business. When a lien is placed on your business, your lending risk will increase. That means lenders will be significantly less likely to lend you money, and even when they do, you'll be subject to paying a higher interest rate. Also, depending on your agreement, your lender may be able to cancel your agreement if they become a secondary creditor behind the IRS.
Seize your personal assets
There is no liability protection from the IRS. So even if you've protected your personal assets from claims made against your company through a limited liability company (LLC), limited partnership or a corporation, you're still responsible for paying your payroll taxes and the IRS can seize your personal assets to collect them.
Taking it one step further, if you have a second signer on your payroll checks, they're also personally responsible for your payroll taxes and the IRS can seize their personal assets as well.
Penalize you in several ways
The IRS can issue multiple penalties for failure to pay your payroll taxes. If you don't file your payroll taxes, you get hit with a "failure to file" penalty. If you don't deposit the money within 3 days, you get hit with a "failure to deposit" and a "failure to pay" penalty. (That's already 3 penalties for those keeping score at home.) And if you haven't paid your payroll taxes within 16 days from the time they were due, you'll now owe an additional 33% of your tax bill in penalties.
Furthermore, your tax bill can increase quickly with cascading penalties. For example, if you missed a $2,000 deposit for week 1, but you make your payments on time for week 2 and week 3, your week 2 payment will be applied to the week 1 shortfall and then you're assessed payroll tax penalties for week 2. So unless you make up your missed payment(s) and corresponding penalties in very short order, those penalties will keep growing.
Shut you down
If you don't pay your payroll taxes, the IRS can penalize you by literally locking your doors and shutting down your business. They can even call your customers and instruct them to send their money to the IRS instead of your business. And they can do all of this without a court order.
Try to put you in jail
Not paying your payroll taxes is a federal crime. If the IRS believes you willfully and knowingly violated the law, it can send your case to its criminal investigations division and the Justice Department for criminal prosecution. You can be subject to fines and in some cases, people go to prison as a penalty for not paying their payroll taxes.
You can find more information right on the IRS website.
In short, if you're falling behind on your payroll taxes or are concerned about your ability to pay them in the future, it's best to seek the advice of an expert to avoid severe penalties from the IRS.
As always, if you have any questions after reading this article, please get in touch with us. We've processed millions of payrolls for thousands of clients over the last 25 years, and we're happy to answer any questions and point you in the right direction.