Payroll taxes are a necessary part of any business, big or small. The Internal Revenue Service (IRS) and the state of California take payroll taxes seriously, and won't hesitate to bring legal action against your business if you don't pay. You could face fines, prison time, and property seizure. If your California business has unfiled payroll taxes, a reliable tax attorney can help you avoid harsh penalties and protect your business.
What Are Your Payroll Tax Filing Requirements?
All businesses must file and pay payroll taxes to the IRS. The three basic employment taxes you're responsible for are federal income tax, Social Security and Medicare taxes, and the Federal Unemployment Tax Act (FUTA) tax.
Your business must keep records of all compensation paid to employees and contractors. You typically give your employees a Form W-2 and your contractors a Form 1099 so they can report the income they receive from you.
Federal Income Tax
You must withhold federal income taxes from all your employees' wages and deposit the withholdings. An employee's Form W-4 will determine how much tax should come out of their paycheck.
Social Security and Medicare Taxes
As an employer, you're generally responsible for withholding Social Security and Medicare taxes, then paying your employees the matching amount. Again, you'll need the Form W-4 to calculate how much Social Security and Medicare taxes you withhold and deposit.
If you pay more than $1,500 in wages during one quarter, you must file and pay the FUTA tax. This tax isn't withheld from employee paychecks but paid from your own tax funds. The FUTA tax forms are Form 940 and 941. If you're a small business with annual tax withholdings of less than $1,000 per year, you may also have to file Form 944.
Penalties for Unfiled Payroll Taxes
If you don't file your payroll taxes, the IRS can issue penalties. Specifically, you could face the failure-to-file penalty. For each month that your return is late, the IRS charges you 5% of the tax debt owed, up to 25% maximum.
If you haven't filed your taxes when you're supposed to, the IRS will send you notices, giving you deadlines to file and to pay. If you ignore these notices, the agency will impose penalties or resort to legal action. These penalties include garnishing your bank accounts, placing a lien on your property, or issuing a levy on your account receivables
You must deposit your payroll taxes by specific due dates. If you don't, the IRS will charge you late fees.
Fees for filing payroll taxes late:
- 1-5 days late: 2% of the required tax
- 6-15 days late: 5% of the required tax
- 16+ days late: 10% of the required tax, plus interest
For a late Form 941, it's a 5% penalty per month that the form's late, up to 25%.
Failing to file could land you more than late fees. The IRS could also find you negligent and impose their negligence penalty instead. Negligence is “any failure to make a reasonable attempt to comply with tax laws.” The IRS doesn't see negligence as intentional disregard for tax compliance, as that would be fraud.
Not making an effort to understand your tax obligations still carries a penalty, however. The IRS negligence penalty is 50% of the interest charged on underpayments.
Fraud is an intentional attempt to avoid paying taxes, or pay less than what you owe. If you fail to file payroll taxes after the IRS has contacted you, the agency might consider investigating your business for fraud.
What are some examples of fraudulent payroll taxes?
- Refraining from filing payroll tax reports intentionally
- Knowingly failing to report cash payments to employees
- Understating or omitting income
- Concealing sources of income
- Failing to withhold federal income tax from employee paychecks
- Keeping false records or no records at all
- Using a third-party payroll service that doesn't deposit funds to the IRS
- Making large cash transactions frequently
To convict you of tax fraud, the IRS has to build a case against you, finding multiple signs of tax evasion. If convicted, your business will have to pay 75% of your underpaid tax amount.
Until September 2018, the Offshore Voluntary Disclosure Program allowed businesses to declare foreign assets and income without possible prosecution. However, that program has now ended, and your business must disclose offshore assets to the IRS or face large penalties
The IRS expects businesses to report and file their payroll taxes honestly without the need for government intervention. This voluntary compliance system puts the responsibility to declare your business' taxes accurately on you. It doesn't mean that paying taxes is voluntary, however. Filing and paying taxes is mandatory.
Although the IRS relies on individual taxpayers and businesses to comply with tax rules, the agency does use audits to investigate tax returns that don't seem accurate. You're supposed to give honest and accurate tax returns, but it's always possible that you can make a mistake. Audits account for those mistakes.
Can the IRS Collect Back Payroll Taxes?
If your business has delinquent federal payroll taxes, the IRS can go as far back as 10 years to collect, provided a judgment was not filed by the Department of Justice or a legal proceeding on those tax liabilities. The IRS has 10 years from the date you filed the tax return, not the date the tax return was due, however. If you filed your 2015 return in 2017, for example, the collection statute of limitations runs until 2027.
Can the IRS File a Payroll Tax Return on Your Behalf?
If you don't file your payroll taxes and don't respond to the IRS' attempts to contact you to do so, the IRS could perform a substitute tax assessment for you, known as a 6020(b) assessment. The agency uses information from your prior tax returns to create a current one. The IRS might also use information from other businesses in your industry to determine what your tax burden is. As you can imagine, these assessments end up being inaccurate and may cause you to pay more than your business owes.
Payroll Taxes in California
In addition to paying federal payroll taxes, your California business is obligated to pay certain state employment taxes as well. These taxes include Unemployment Insurance, Employment Training Tax, State Disability Insurance, and California Personal Income Tax.
Unemployment Insurance, or UI, is a quarterly tax that all California employers must pay to help fund short-term payments to workers who lose their jobs. If you're a new employer, the UI tax rate starts at 3.4%.
Employment Training Tax
The Employment Training Tax (ETT) doesn't apply to all California businesses but only to employers in certain industries. The rate is 0.1% and goes toward training for employees.
State Disability Insurance
California employers must withhold 1% of all employees' gross income to contribute to a fund that provides short-term payments to workers with a disability caused by a non-work-related accident. The payments are also for workers who are caring for seriously ill relatives or children.
California Personal Income Tax
As an employer in California, you must withhold personal income tax from your employees' paychecks, which will go to the state for public infrastructure and schools. The Personal Income Tax (PIT) rate ranges from 1% to 13.3%.
Penalties for Unfiled Payroll Taxes in California
The California agency in charge of collecting payroll taxes is the Employment Development Department (EDD). The EDD has harsh penalties for failing to file and for UI fraud. Late payroll tax payments garner a penalty of 15%. The EDD may also place a lien against your business property.
If you're guilty of UI fraud in California, the penalties could include:
- Jail or prison sentences
- Repaying the UI benefits
- Paying penalties and fines
- Losing the right to future tax refunds
- Losing the right to collect future UI benefits
The 15% penalty for late tax payments turns into 25% if the EDD finds your returns were fraudulent.
What are some examples of UI fraud in California?
- Paying employees off the record and not reporting wages to the EDD
- Not reporting new hires
- Helping someone else prepare and file a false UI claim
- Reporting false start dates for new employees
What to Do if You Have Unfiled Payroll Taxes
If you have unfiled and unpaid payroll taxes, you might be tempted to ignore the problem and hope it goes away. The IRS and the EDD, however, will be persistent when it comes to collecting taxes or convincing you to file.
To deal with unfiled payroll taxes and avoid penalties, you should act as soon as possible. Try to get current on your past returns, so you see where you stand. You should also contact a tax specialist, who can represent you to the IRS and advise you on the best tax options in your situation. Contact a California Tax Attorney today for assistance with your unfiled payroll taxes and resolve your tax issues.