A failure to pay payroll taxes can lead to serious penalties, including potential criminal charges.
Employers are required by the Internal Revenue Service (IRS) to deposit and report payroll taxes. These taxes are taken out of wages and earnings and used to fund Social Security benefits, Medicare Insurance, unemployment and other programs. It may be tempting to skip paying these taxes, especially when behind on other debt obligations. This choice may be justified by the intention to catch up on these payments at a later date, but people rarely do and these taxes should be taken seriously.
One motivation to take these taxes seriously: potential penalties. Congress passed the Trust Fund Recovery Penalty (TFRP) in an effort to encourage employers to pay these taxes. The law provides penalties and applies to any person responsible for collecting or paying these taxes who willfully fails to do so. The IRS defines "willfulness" in these instances as an awareness of the outstanding taxes, an intentional disregard for the law or indifference to the requirements. It clearly states no evil intent or bad motive is required to qualify as a willful failure.
What to do if accused of failing to pay payroll taxes
First, it is important to take any allegations of failing to pay these taxes seriously. Generally, business owners incorporate their enterprise to help shield themselves from personal liability. However, it is important to note that the law is written in a manner that allows the IRS to pierce the corporate veil. This is a legal phrase that refers to the ability to get past the protections provided by the business entity and hold the individuals within the business liable for the missed payments as well as any additional penalties.
Those who are found to qualify as a responsible person by the IRS and fail to pay these taxes may be assessed a TFRP. In these cases, a letter is sent to the accused outlining the IRS’s intention to move forward with the assessment of a TFRP. After receiving this letter, the accused generally has 60 days to appeal. A failure to pay these taxes can come with harsh penalties, including potential criminal charges. As a result, it is wise to take these allegations seriously and contact an experienced employment tax dispute lawyer.
More on the payroll taxes
It can help to have an understanding of how this tax works. The payroll tax is broken down as follows:
- Social Security. This tax is also referred to as the Old Age, Survivors, and Disability Insurance (OASDI) tax. Employers and employees both pay a percentage of the wages towards this tax, currently set at a contribution of 6.2 percent each. The tax applies for the first $118,500 of the employee’s annual earnings for tax years 2015 and 2016.
- Medicare tax. Employers and employees each contribute 1.45 percent of wages, regardless of the amount. Unlike the Social Security tax, which ends at $118,500, there is no limit to the wages taxed for this tax during the 2015 and 2016 tax years.
- Unemployment tax. Under the Federal Unemployment Tax Act (FUTA), employers are required to pay 0.6 percent on an employee’s first $7,000 of earnings. Additional state taxes can apply. In Ohio, most employers are required to pay Unemployment Compensation taxes and report wages each quarter. Ohio’s Department of Job and Family Services notes that the exact tax rate will be determined for each enterprise. However, employers are expected to contribute at a tentative rate of 2.7 percent.
Issues that arise regarding these taxes are generally complex; making it imperative a tax lawyer is contacted to help protect your interests.