Payroll Tax Penalties Small Business Owners Should Avoid

Small business owners might think it’s easy to avoid accruing any payroll tax penalties. However, you will find quickly that businesses of all sizes frequently make avoidable payroll errors. If you run a small business, these mistakes can significantly affect your finances. They may even put the future of your company in jeopardy.

You cannot escape filing your payroll taxes. But they can also become confusing if you or your employees do not keep track of the distinctions. The taxes come as federal, state, and local forms. Therefore, knowing what mistakes you need to avoid making on each form is crucial. Your small business should avoid the following penalties to remain viable with your competitors.



Common Small Business Payroll Tax Penalties

The Internal Revenue Service can hand out penalties for several reasons. However, the federal agency will first determine whether your company did or did not comply, whether intentionally or unintentionally, with their rules. In some cases, you may unintentionally make an error when administering your company’s payroll taxes. The severity of the IRS’ penalty will likely be lesser.

However, the Internal Revenue Service will come down hard on your company if you knowingly make an error or commit payroll tax fraud. One type of fraud is if you pay employees in cash to avoid paying taxes. You have also committed fraud if you do not file payroll tax returns. A third common type is if you file false payroll tax returns. These include if you understate the amount your company owes in taxes. Payroll tax penalties that the IRS may issue can include:

  • Deposit Penalties – Small business employers must withhold taxes from your employees’ wages. The taxes that you must withhold will include: Social Security tax, federal income tax, and Medicare tax. Electronically remit these taxes semi-weekly or monthly to the IRS. It will depend on the established deposit schedule.
  • Failure to File – You must use the correct payroll tax forms when you report your liabilities to the IRS. In most cases, employers will file quarterly returns with Form 941. Take note if your business has a federal payroll tax liability of $1,000 or less in a year. The IRS may permit you to annually use Form 944. If you do not file a return for a whole or partial month, the IRS will issue a 5% penalty on the total owed tax.
  • Trust Fund Taxes – Employers must withhold federal payroll taxes from employee wages. They also must remit the withheld payroll taxes. Failure to do so results in the IRS imposing a penalty for 100% of the unpaid trust fund tax.


Choose AMS for Your Payroll Software Solution

Investing in reliable payroll software can help you avoid payroll tax penalties. Our software will meet all your small business payroll software needs. It supports multiple federal payroll forms, including forms such as the 941 and 944. Users can further create an SSN verification file and electronically file their federal payroll forms directly to the IRS. This makes for an excellent addition to our 1099/W2 Forms Filer, which is our base program.


Software Solutions from AMS

Our W-2 and 1099 Forms Filer is our only required platform. From there, users pick the services they need. Choose from the tools below to build out your customized accounting software.