The IRS estimates that roughly 40% of small businesses incur an average of $845 per year in IRS penalties due to payroll mistakes. In the article, I discuss the six most common mistakes companies make when processing their payroll including:
1. Failing to register your business
– Companies must register their business with the federal government and in each state, municipality, and city in which they conduct business and are required to withhold and pay income and employment taxes.
2. Deducting the wrong amount
– Although federal employment taxes are straightforward, they’re more complicated at the state and local level. Each state, municipality, and city has its own rules, and tax rates frequently change. Systems and processes must be established to ensure that the responsible party is aware of these changes and incorporates them into the company’s payroll system.
3. Misclassifying Employees
– The Federal Government and some states may have different rules on classifying a person as an employee or contractor. The Federal Government uses the answers to 20 questions to determine how a worker must be classified where in New Jersey worker classification is based on the following criteria:
- The worker’s performance must be free from the business’s control or direction.
- The service the worker provides must be outside of the usual course of the business.
- The worker currently has or has had professional engagements with other businesses, industries, or trades.
It could be costly if the IRS or the state of New Jersey finds a worker is misclassified without reasonable cause. The business owner and/or responsible party could be held liable for paying employment taxes, as well as penalties and interest.
4. Not Paying Taxing Authorities
The Trust Fund Recovery Penalty (TFRP) can be imposed by the IRS for:
- Willful failure to collect tax,
- Willful failure to account for and pay tax, or
- Willful attempt in any manner to evade or defeat tax or the payment thereof.
The term "willful" is defined by the IRS as "intentional, deliberate, voluntary, and knowing, as distinguished from accidental.”
TFRP penalties can be steep and complicated. For example, the penalty for not filing an Employer's Quarterly Federal Tax Return (Form 941) on time is 2% for being 1-5 days late, 5% if 6-15 days late, 10% if more than 16 days late or within 10 days of first notice from the IRS. The maximum penalty is 15%. Consult IRS Publication 15: Employer's Tax Guide for a complete description of TFRP penalties.
5. Making late deposits
- Deposits are applied to the most recent liability and are due by the 15
of the month. A company may be assessed a penalty for un-deposited funds, even if the money is deposited in the subsequent period.
6. Failure to prepare W-2 and 1099 forms
Employees must be provided with a W-2 by January 31. A $50 penalty may be imposed for late or incorrect W-2 statements. Form 1099-MISC must be issued to each independent contractor paid $600 or more during the tax year. The contractor must receive Form 1099-MISC no later than January 31 and the IRS on or before February 28. If you submit Form 1099 within 30 days from the due date, the penalty is $30 per form. If it is filed more than 30 days late but before August 1, the penalty is $60 per form. The penalty increases to $100 for any form filed after August 1 or not filed at all.
to read the article.
As a reminder, employers had to start using the new Form I-9 on September 18, 2017 to verify that their employees are eligible for work in the U.S. See our
on the subject for all of the information you need.
Please feel free to contact me at 610.828.1900 or
to discuss how to avoid paying a penalty. I am always happy to help.