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In the last six months we have seen a marked increase in the number of contractors who have required our assistance to resolve payroll tax issues with the IRS. All of these clients had one thing in common. They stated that they knew very little about their responsibility to report and remit payroll taxes; instead, they had assigned that task to an employee. Payroll taxes are one of the areas in which the IRS prioritizes compliance, as it represents a significant stream of income for the U.S. Government.
Due to the severity of the penalties that result from not meeting payroll tax obligations we’ve put together a few key points aimed at helping contractors with the issue.
The information included here is meant as a helpful guide for contractors as to an employer’s obligations regarding payroll taxes. If you need additional information or have a more specific payroll problem, please contact a tax professional.
Employee and Employer Obligations
Employees and Employers have specific payroll tax obligations that must be paid to the US Government. The employee’s part of the payroll taxes consists of the employees’ federal income tax and FICA [Federal Insurance Contributions Act]. Because FICA taxes are held in trust by the employer [on behalf of the employee] until they are paid to the Department of the Treasury, they are also called Trust Fund Taxes.
FICA consists of social security tax which is 6.2% of the employees’ gross pay and Medicare which is 1.45% of the employees’ gross pay. Employers are responsible for withholding each employee’s payroll taxes and subsequently remitting these to the U.S. Treasury. The employer part of the payroll taxes consists of FICA and Federal Unemployment (FUTA) Tax.
FUTA provides unemployment compensation along with State unemployment programs for those who have lost their jobs. FUTA is an employer tax, which means it is not withheld from the employee’s pay. The 2024 FUTA tax rate is 6% which is applied to the first $7,000 of each employee’s gross earnings for the year.
Payroll Taxes Return Forms, Filing Dates and Deposits
There are a number of different forms on which payroll taxes can be reported, however, the three most commonly used by contractors are 940, 941, and 944.
Form 940: Employer’s Annual Federal Unemployment Tax (FUTA) return
Form 941: Employer’s Quarterly Federal Tax Return
Form 944: Employer’s Annual Federal Return
The filing periods for these forms and their due dates are as follows.
Form 940
Annual Filing Period
If the annual FUTA liability is less than $500, the payment deadline is January 31 of the following year. If the FUTA liability is more than $500 for a quarter, a deposit of at least 25% of the liability must be made by the last day of the month following the end of the quarter.
Remember, as an employer, you face penalties for not being in compliance with your obligation to collect and remit the required payroll taxes. It is mandatory for taxpayers to make deposits of the withheld taxes prior to the filing of the payroll returns.
Tax deposits are required to be transmitted electronically, with the funds being transferred through the Electronic Federal Tax Payment System (EFTPS).
Form 941
Filing Period Due Date
Quarter 1: January – March. April 15
Quarter 2: April – June July 15
Quarter 3: July – September October 15
Quarter 4: October – December January 15
The full guidelines for deposit requirements can be found in the IRS Publication 15. In a nutshell, employers are required to make either monthly or semi-weekly deposits of the employee and employer payroll taxes.
Form 944
Filing Period Due Date
January – December Due on January 31 (of the following year)
A business whose employment taxes for the calendar year are estimated to be $1,000 or less means that business could be eligible to file Form 944.* If you’re uncertain whether your business qualifies, or would like to know more about how to determine your eligibility, contact a Professional Tax Consultant or CPA.
Filing and Payment Penalties**
Failure to File Penalty: 5% per month limited to 25%
Failure to Pay: 0.5% per month limited to 25%
Failure to Deposit: 2% on deposits made 1 to 5 days late
5% on deposits made 6 to 15 days late
10% on deposits made 16 or more days late
15% on deposits made more than 10 calendar days after the date of your first notice or letter (for example, CP220 Notice) or The day you get a notice or letter for immediate payment (for example, CP504J Notice)
Trust Fund Taxes
As mentioned earlier, Trust Fund Taxes (income taxes and FICA) are the employee portion of the payroll taxes, held “in trust” by the employer until they are deposited in the US Treasury.
The IRS takes employers’ failure to pay trust fund taxes seriously, primarily because there are taxpayers who are entitled to, and paid refunds by, the US Treasury for funds they have not received.
If an employer fails to pay the Trust Fund taxes, the IRS has the right to assess the Trust Fund Recovery Penalty (TFRP). Utilizing IRC (Internal Revenue Code) 6672, this process will be carried out against any “responsible person” of the business who willfully fails to collect, account for, and pay over taxes held in trust.***
The TFRP may be imposed for:
- Willful failure to collect tax
- Willful failure to account for and pay tax
- Willful attempt in any manner to evade or defeat tax or the payment thereof
The Trust Fund Recovery Penalty is equal to 100% of Trust Fund Taxes. The IRS has the right to impose liens and levies on the party responsible to recover the outstanding taxes.
*Source: Internal Revenue Service, “Certain taxpayers may file their employment taxes annually”
**Source: Internal Revenue Service, irs.gov
***Source: Internal Revenue Service, 8.25.1 “Trust Fund Recovery Penalty (TRFP), Overview and Authority ”
Founder and CEO of LEK Management Inc., Lynn Karam has two decades of experience in finance, operations, and strategic planning. Karam is an Enrolled Agent authorized by the United States Department of the Treasury to represent clients who are undergoing an audit and to negotiate with the IRS on her clients’ behalf. Her success rate in resolving even the most challenging of IRS scenarios has become the cornerstone of her success. As CEO, Karam uses her financial expertise to establish sustainable strategies that result in significant business growth for her clients.