All employers in the United States are required to withhold payroll taxes from the pay provided to employees. Payroll taxes include federal income tax, Social Security tax, Medicare tax, and unemployment taxes. Social Security and Medicare taxes together are referred to as FICA tax, which stands for the Federal Insurance Contributions Act. In addition, many states also require that state income tax be withheld from employee paychecks, and some counties or cities also require tax withholding. Most of the common payroll tax problems arise from the employer not fully understanding all aspects of the required payroll taxes.
To process their payroll, employers must first calculate the gross pay for each employee. Then the various payroll tax amounts are deducted from the gross pay amount, with the result being the net pay, which is the amount the paychecks are made out in. After paychecks have been given to employees, the employer is still responsible for more payroll-tax related activities, including paying the employer share of Social Security and Medicare taxes, depositing the taxes which are withheld from employee pay, preparing financial and reconciliation reports, and filing of payroll tax returns.
Although there are many ways to run into difficulties with such a complex process, the most frequent payroll tax problems employers experience include:
- Past due collection of payroll taxes and late filing of reports, which can lead to penalties, interest charged, and eventually, forfeiture of the business.
- Careless record-keeping, which can be problematic when dealing with an IRS audit. Since small business owners historically are the largest source of uncollected taxes according to the IRS, the agency is focusing their enforcement efforts on smaller businesses. Many payroll tax problems are uncovered during the course of these audits.
- Borrowing from payroll tax money, which is against the law.
This practice is not uncommon among small businesses which need the money to pay their operating expenses. Payroll taxes collected from employee pay must generally be filed or deposited within three days of the date of the paychecks.
It is a given that all legit businesses must deal with taxes and accept it as part of doing business. In addition, business resources such as time, money, and finances, have to be unwillingly diverted to resolve tax law issues, whenever they arise. It would be better for a business to work with third-party law firms in preventing and resolving tax issues; this would allow a business to not worry about taxes and focus on their core functions.
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Too Good to Be True?
Whatever you do though, make sure you do your homework and choose a reputable firm. According to David Yarborough, EA, many of those “I settled for pennies on the dollar” television commercials that air late at night are indeed too good to be true. There are some firms that are more interested in taking your money than in truly providing the right solution. For this reason, we recommend working with a professional such as a tax attorney, CPA or Enrolled Agent (EA).