The 6 Most Common Payroll Tax Issues

Managing payroll taxes is a key part of running a business. However, given how complicated payroll taxes can be, it’s not uncommon for business owners to make mistakes. These errors can be costly, though – and detrimental to your company. In the worst cases, you could incur severe debt and even lose business assets.

The good news is that it’s relatively simple to avoid such penalties. You just need to understand how to file accurate payroll taxes on time. So, to help you manage your payroll more effectively, here is a rundown of the most common payroll tax issues. We will also explain how to avoid them.

What are Payroll Taxes?

Payroll taxes are taxes paid on employee earnings. They’re deducted from the employee’s wage, or salary, and paid by the employer to the government. Employers then also pay an equivalent share of Medicare and Social Security taxes.

Payroll taxes cover government spending on essentials, such as infrastructure, health, and social security programs. Unsurprisingly, then, the government takes accurate payroll tax reporting seriously. So, what are some common payroll tax issues that could cause your business problems? Let’s take a look.

1. Misunderstanding Your Obligations

Tax laws are complicated. As a business owner, you may be confused by your payroll tax obligations.

However, if you’re unsure which laws apply to you, then you could make avoidable payroll tax mistakes. Stay informed and be alert to any changes which may impact how you collect, process, or submit payroll taxes.

The Innovative Tax Relief team understands the law and how it affects your tax obligations. That’s why we offer tax preparation services to help you organize your taxes with confidence.

2. Misclassifying Workers

A common payroll tax issue is “misclassifying” workers. This means either wrongly classifying a worker as a contractor or an employee.

Why does the distinction matter? Because it determines whether you should be withholding tax for payroll tax purposes. For example, you wouldn’t normally withhold taxes for freelancers, or independent contractors. If you misclassify a worker, you could wrongly pay, or withhold, taxes.

You can easily avoid this payroll tax mistake by clearly distinguishing between employees and contractors. Always seek legal advice if you’re unsure how to categorize those who work for you.

3. Missing New Hire Paperwork

When you hire an employee, you must complete certain paperwork. This lets you report their information correctly when it’s time to file taxes. Forms you might complete include a W2, W4, and I-9.

You face charges and penalties for every incomplete or inaccurate form. This mistake can be avoided by:

• Having a comprehensive onboarding process; and
• Double-checking your paperwork prior to filing payroll taxes.

4. Failing to File a Payroll Tax Return

It’s crucial to file tax returns on time. However, running a business can be overwhelming. As such, it’s not uncommon for business owners, especially small business owners, to overlook tax return deadlines.

If you do miss your payroll tax return deadline, or fail to submit the right paperwork, don’t panic. Instead, take prompt action. To mitigate any penalties, interest, or charges, contact our team. We’ll help you negotiate with the IRS and explain what options you have for settling the tax debt.

5. Incomplete Tax Records

You have a duty, as an employer, to keep accurate records for tax reporting purposes. For example, you should record:

• Sick pay
• Overtime
• Hours worked
• Vacation time
• Employee bonuses

Failing to maintain accurate records could result in payroll tax problems. The IRS may perform an audit, or undertake further investigations, if you can’t produce records when requested.

Are you facing an IRS audit? Contact us to discuss representation.

6. Paying the Wrong Tax Rates

Tax rates don’t stay the same. Federal income tax rates, for example, can change annually. If you file taxes based on the wrong rates, you could accidentally incur tax debt.

Back taxes and penalties quickly add up, and you could face significant cashflow problems over time. This common payroll tax issue can be avoided by double-checking which tax rates apply before you file.

Our team is happy to help if you’re unsure which rates apply to your business.

Consequences of Payroll Tax Problems

A failure to pay payroll taxes can have serious consequences. Whether you overlook a deadline or misclassify a worker, the penalties can include:

• Interest charges
• Penalties e.g. failure to file penalties, accuracy penalties
• Company bank account garnishment
• Tax liens over company property

For example, say you miss the filing deadline. You could face a failure to file penalty of 5% for each month that the tax return is overdue. Or if you fail to pay your tax debt, the IRS could place a lien over business assets. This could affect the profitability and running of your company.

If you have payroll tax due, and you’re unsure how to manage the situation, call our team.

Let Innovative Tax Relief Help You Manage Payroll Tax Debt

Payroll tax issues can quickly spiral into serious tax debt. However, the sooner you address the situation, the easier it will be to manage your tax liabilities. And that’s where Innovative Tax Relief can help.

At Innovative Tax Relief, we’re committed to helping business owners take control of their finances. We are passionate about finding effective solutions to any payroll tax problem – no matter how much you owe.

If you need help with a payroll tax issue, don’t hesitate to contact us. We offer free initial consultations where we can provide an overview of your options and how you might move forward. And if you require assistance negotiating a payment solution, we can help with that, too.

Take back control of your business finances. Don’t let payroll tax issues overwhelm you. Contact Innovative Tax Relief now for a free first consultation.