Filing taxes

Payroll Tax Penalties and How to Avoid Them

written by Claudia Grant
reviewed by cinnamon
September 26, 2022

You know the adage, there are two things you can count on in life, death and taxes. When it comes to payroll taxes, the IRS doesn’t mess around.

These payroll taxes, known as trust fund taxes, are expected on time by the IRS. In fact, they reserve some of the harshest IRS penalties for those who don’t pay payroll taxes on time.

All businesses need to pay payroll taxes, sometimes even if you’re hiring freelancers.

Failure to get the payroll tax submitted to the IRS promptly can quickly add up to a hefty bill with the IRS in payroll tax penalties.

Read on to learn more about the penalties that come from unpaid payroll taxes and how to avoid them.

What Are Unpaid Payroll Tax Penalties?

Let’s start with a general understanding of unpaid payroll tax penalties or employment tax penalties. These are penalties issued by the government; typically, the IRS for not paying the required taxes taken from employee wages.

When an employer calculates wages, they must remove certain federal and state taxes for things like social security and unemployment. Then they must submit these taxes to the IRS.

If an employer either doesn’t take the taxes out or takes them out and doesn’t pay them to the IRS on time, the employer can face these stiff penalties.

Failure to pay can occur for any number of reasons, including incorrect calculations, missed deadlines, and improper reporting. Whatever the reason, the penalties can add up quickly from the IRS and should be avoided if possible.

How to Avoid Payroll Tax Penalties

So, what can an employer do to ensure they pay the required payroll tax on time? It may depend on what’s causing the employer to pay late.

Let’s take a closer look at some things you can do to ensure those payroll taxes are paid on time.

Budget for Tax Payments

The idea that you need to set up a budget for tax payments may seem almost simplistic, yet many businesses just fail to plan for the payment of these taxes. This is especially true for a small business.

When you budget for your business, you need to consider the number of employees you have and what you generally are expected to pay in payroll taxes each month.

Then make sure this is a part of your monthly expenditure budget.

Automate Payroll

For many businesses, even small ones, the best solution to assist with payroll and the associated taxes is to automate their payroll system.

There are many different types of programs your business can use to automate payroll calculations and will also handle your tax payments.

Generally, these payroll systems make handling payroll much simpler and more streamlined once set up. It helps businesses avoid problems and miss payments.

Keep Up With IRS Requirements

Employer liabilities include ensuring you know all the expectations of the IRS. The IRS regularly provides information to employers about what is expected of them. This might include information related to:

  • Publishing news releases
  • Tax return news
  • Tax law updates
  • Tax tips
  • Form deadlines

Paying attention to the information the IRS is pushing out to you as a business will help to avoid you not doing what they expect.

Evaluate your tax situation

By evaluating your tax situation, you can identify areas where you may be able to reduce your tax burden and make informed decisions about your financial future.


Don’t Borrow from Payroll Tax Funds

One of the most commonly identified reasons employers end up behind in paying payroll taxes is because they borrow those tax dollars for other business-related expenses.

While it might be tempting to borrow tax dollars you should pay to the IRS if you have a bill due or are tight on funds, it can only lead to expensive problems.

This goes back to setting up a careful budget to ensure you have the funds set aside to pay when they are due.

Maintain Employee Classification

You’re required to pay payroll taxes for regular employees. Freelance or 1099 employees are required to pay their own taxes.

Be sure to keep track of the classification of your employees, so you pay the taxes for who you should pay for.

Be careful to avoid reclassifying an employee to use the tax money for a different purpose. The IRS has stiff penalties for listing an employee as an independent contractor when you know they are not one.

What Happens If You Have Unpaid Payroll Taxes?

There is no gray area on this one; you will face penalties if you have unpaid payroll taxes with the IRS. They can also add up very quickly if you don’t work to resolve them.

The IRS uses a two-part system to establish penalties. These failure-to-pay penalties escalate the longer you go without paying.

They will consider the amount you’re expected to pay and charge a percentage of that amount—the later your payment, the higher the percentage that you’re charged.

Payroll Tax Penalties

If you fail to pay the payroll taxes, the payroll penalties will include:

  • Monetary penalties
  • Interest on back taxes
  • Liens against property
  • Civil and criminal sanctions
  • Jail sentences

Of course, the longer you go without paying, the more significant the penalties will become.

Penalty Exemptions

A few exemptions allow for late payments would help you avoid paying the payroll penalties. If a business receives a TFRP notice from the IRS, you can seek an abatement for a reasonable cause for being late.

Some reasons for an exemption include:

  • Natural disasters and fires
  • Missing records
  • Death and serious illness
  • Unavoidable absence of the taxpayer or immediate family

Be prepared to show documentation to prove your reason for exemption. It’s important to note that not having enough money does not qualify for an exemption.

What to Do If You Have Back Payroll Taxes

The one thing you should not do if you’re behind on taxes is to ignore the problem. It will only get worse, and the IRS does get its money.

The punishments and penalties greatly escalate over time. You don’t want to ignore the problem.

There are solutions for back payroll back taxes. It might be smart to work with a tax relief company so they can help come up with a viable solution with the IRS.

Avoid Trouble With the IRS and Payroll Tax Penalties

Payroll tax penalties can quickly turn into a very serious problem for a company. The penalties increase over time, meaning you can end up with a bill with the IRS that is difficult to rectify.

If you’re looking for help in dealing with your tax problem, we can help. Contact us today to discuss how we can help your business get back on track.

Claudia Grant

Claudia Grant is a seasoned financial expert with a rich and diverse background. Holding a Master of Science in Taxation, Claudia's 15 years as a CPA and ten years as a financial manager have shaped her into a true industry authority. Departing from the traditional office setting, Claudia now thrives as a tax and financial consultant, catering to a wide array of companies. Her passion for sharing knowledge shines through her insightful articles, where she breaks down complex financial concepts into simple pieces. Claudia's expertise and dedication make her an invaluable resource for businesses seeking adept financial guidance in an ever-evolving landscape.
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