Payroll Taxes

The IRS considers failing to pay payroll taxes to be the ultimate act of tax delinquency. This is the failure of an employer to send payroll taxes to the IRS that it has withheld from its employees' pay. According to the IRS, failing to pay your company's payroll taxes is equivalent to robbing your employees of their money.

What are Payroll Taxes?

Payroll taxes are taxes that employees and employers must pay based on wages and tips earned and salaries paid to employees. The employee pays part of these taxes through a payroll deduction, and the employer pays the rest directly to the IRS.

There are four basic types of payroll taxes:

1. Federal income
2. Social Security
3. Medicare
4. Federal unemployment

Employees must pay Social Security and Medicare taxes through payroll deductions, and most employers also deduct federal income tax payments. The income tax deduction varies depending on the employee’s withholding status. Employers must pay federal unemployment tax, and the IRS expressly prohibits employers from deducting this cost from their employees.

Unlike the federal income tax that goes to the government’s general fund, FICA taxes fund only Social Security and Medicare programs. The first is a 12.4 percent tax to fund Social Security, and the second is a 2.9 percent tax to fund Medicare, for a combined rate of 15.3 percent. Half of payroll taxes (7.65 percent) are remitted directly by employers, while the other half (7.65 percent) is taken out of workers’ paychecks.

How Do I Report Payroll Taxes to the IRS?

To report payroll taxes or in other words employment taxes to the Internal Revenue Service an employer would use Form 940, Form 941 and/or Form 944. These forms are not the same and both must be filed. Form940 must be filed annually, where as Form941 is filed quarterly, however it's possible the IRS will instead allow you to File Form944 yearly instead of the Form941 quarterly.

What Happens if an Employer Does Not Send in Payroll Taxes to the IRS?

The IRS is quick to crack down on businesses and prospective responsible individuals, and when they do, they frequently have a particularly unpleasant attitude. The IRS would sooner close your company and sell off your assets than provide you with the chance to stop paying additional payroll taxes.

The IRS has special powers granted to them by the U.S. government to levy your bank account. The same with real estate, social security benefits, 401(k)’s, IRA’s, cars, boats, houses, accounts receivable, cash loan value of your life insurance and even commissions owed to you by others, all to satisfy a tax debt.

I have personally witnessed the IRS chain and padlock the front doors of a business without a court order.

Can payroll taxes be discharged in bankruptcy?

The answer is simple: no.

Who is Responsible for Paying These Taxes?

Owners, partners, and corporate officers are held personally liable for unpaid payroll taxes.

The question you need to ask is, would the IRS consider you "responsible?" Have you ever signed a payroll check? If so, chances are good you’re on the hook. However, it may not be clear. The IRS has a two-pronged test to determine if you are a "responsible person":

(1) Whether the party against whom the Trust Fund Recovery Penalty is proposed had the duty to account for, collect, and pay over payroll taxes; and

(2) Whether he or she willfully failed to perform this duty. 

This does appear to be somewhat ambiguous. Because of this, the IRS faces a challenge in identifying the "responsible" party for the nonpayment of payroll taxes. There is frequently no clear-cut solution. That’s why it’s so important to speak to an attorney to figure out your liability when it comes to payroll taxes.

Is payroll tax the same as income tax?

Employees are responsible for paying income taxes, although both employers and employees are required to pay payroll taxes. Keep in mind that income taxes are progressive, meaning that the more you make, the more you will pay. Payroll taxes, however, are regressive and only take a small amount of your earnings. Payroll taxes are relatively straightforward, whereas income taxes are complicated yet flexible, so they are technically two different taxes.

Although they are levies that the government imposes, income taxes are dependent on a number of conditions and account for the majority of your tax return calculations. Although payroll taxes are used to fund Social Security, Medicare, and other social insurance programs, the government still gets income taxes. Also, while the rate of income tax goes up over time, the rate of payroll tax stays the same.