According to the Internal Revenue Service (IRS) and the National Federation of Independent Businesses (NFIB), almost one-third of companies see penalties due to payroll issues. Understanding a few examples, according to the NFIB, of how companies can better comply and avoid penalties is essential to smoother operations.
Underpayment of Estimated Tax by Corporations Penalty
As long as there’s a reasonable expectation of at least $500 in estimated taxes owed, corporations are required by the IRS to file. If, however, a corporation doesn’t satisfy its estimated tax payments or pays them after their quarterly submission deadline, the IRS will assess penalties. This can occur even if the IRS owes filers a refund.
The IRS recommends the easiest way to avoid the penalty is to pay the quarterly estimated taxes by the 15th day of April, June, September and January of the following year (the following month after each quarter). If the 15th is on a weekend (Saturday or Sunday) or it’s a legal federal holiday, payment would be due on the next regular business day.
When it comes to assessing penalties for underpayment of estimated taxes, the IRS determines the penalty based on how much estimated taxes are underpaid, the time frame of when the payment was due and underpaid, and the IRS’ current quarterly interest rates.
Based on 2023’s third-quarter data from the IRS, the federal agency charges a 7 percent penalty annually, compounded daily.
Failure to Deposit Penalty
Another payroll tax mistake businesses may make is the Failure to Deposit Penalty. The NFIB reported that nearly 50 percent of small businesses see fines on average of $850 annually because they’re late or missing payments. In order for businesses that must make employment tax deposits, it’s imperative to do so either on the IRS’ monthly or semi-weekly basis.
Required employment tax deposits cover Social Security, Medicare and federal income taxes, along with Federal Unemployment Tax. Employers on the monthly route are required to deposit employment taxes on payments for the prior month by the 15th of the following month. For the semi-weekly route, deposits for employment taxes on payments made between Wednesdays and Fridays are to be made by the following Wednesday. For deposits done on a Saturday, Sunday, Monday or Tuesday, employment tax deposits must be made by the following Friday.
Beginning with the due date of the employment tax deposit, the penalty is calculated by the number of calendar days the deposit is late.
Between one and five calendar days, there’s a 2 percent penalty on the unpaid deposit. Between six and 15 calendar days, the penalty increases to 5 percent of the unpaid deposit. If it’s late by more than 15 calendar days, the penalty is 10 percent of the unpaid deposit amount.
If more than 10 calendar days has passed after the first written contact from the IRS notifying the filer of failing to deposit their employment taxes, or the day the business receives correspondence requiring immediate payment of employment taxes, the penalty increases to 15 percent of the unpaid deposit. It’s also subject to interest on the penalty.
While these are only two ways businesses can incur payroll related tax penalties, it’s illustrative of how businesses need to keep on top of their federal (and state) obligations.
Sources
https://www.irs.gov/payments/failure-to-deposit-penalty
https://www.irs.gov/businesses/small-businesses-self-employed/employment-tax-due-dates
https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2
https://www.irs.gov/payments/underpayment-of-estimated-tax-by-corporations-penalty
https://www.irs.gov/newsroom/interest-rates-remain-the-same-for-the-third-quarter-of-2023
https://www.irs.gov/payments/underpayment-of-estimated-tax-by-corporations-penalty