By Mark Battersby –
The Government Accountability Office, Congress’s watchdog, reported that last year 1.6 million businesses owed over $58 billion in unpaid payroll taxes. Little wonder! After all, how can any rural builder hope to avoid or minimize those almost inevitable payroll tax penalties in the face of our ever-changing payroll tax withholding rules?
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Tax Relief Act), reduced the employees’ Social Security withholding rate from 6.2 percent to 4.2 percent for one year, effective with wages earned beginning January 1, 2011. On the other end of the scale, the Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) increases next year to $110,100 from $106,800, which was the wage base for 2009 through 2011.
The Federal Insurance Contributions Act imposes two taxes on employers, employees, as well as on the self-employed — one for Old Age, Survivors and Disability Insurance; commonly known as the Social Security tax, and the other for Hospital Insurance, commonly known as the Medicare tax. The amount of compensation subject to the OASDI tax $110,100, but there is no maximum for HI.
With the FICA (Medicare and Social Security) payroll taxes, the employer pays half of the FICA taxes and withholds the other half from the employee’s paycheck.
Plus, an employer is also responsible for:
• Federal unemployment tax: After the “temporary” 0.2 percent surtax was removed in the summer of 2011, the FUTA rate is 6 percent on the first $7,000 of wages paid annually to each employee.
• State unemployment tax: Like federal unemployment taxes, employers, not employees, pay. Rates are generally based on a business’s location, size and number of employees.
• Supplemental wages: Commissions, draws, signing bonuses, severance pay, annual payments of vacation and sick pay at a different rate than regular pay, and lump-sum payments of accumulated annual leave.
Since January 1, 2011, the IRS has required all federal tax deposits to be made electronically. Employers must apply to use the IRS’s Employment Tax e-file System for the 94x (i.e., Forms 940, 941, and 944) family of tax returns. According to the IRS, payments mailed to the Federal Tax Deposit mailbox in St. Louis are being returned.
Fortunately, there is now a 2011 version of Publication 3823, Employment Tax e-file System Implementation and User Guide, on the IRS website (www.irs.gov).
An employer subject to either income tax withholding or Social Security taxes, or both, must file a quarterly return or, if eligible, an annual return. Form 941 is the quarterly return form, which combines the reporting of income and FICA taxes withheld from wages, tips or supplemental income. Form 944 is the annual return, which is generally filed by “small employers,” (typically those building contractors or businesses with an estimated annual employment tax liability of $1,000 or less.
Form 941 is due on or before the last day of the month following the quarter involved. However, an extension of time for filing is automatically granted to the 10th day of the second month following the close of the calendar quarter if the return is accompanied by depository receipts showing timely deposits in full payment of taxes due for the period.
Forms W-2, 1099-R, and Transmittal Form W-3 must be filed with the Social Security Administration by the last day of February of the year following the year included in the return. The SSA transmits the income tax information in the return to the IRS.
On or before January 31, every employer is required to furnish every employee with copies of Form W-2 showing taxes withheld during the preceding calendar year. Employers may elect, with the consent of the employee, to furnish an electronic, rather than a written, payee statement of Form W-2.
Not too surprisingly, a number of payroll withholding-related issues continue to draw the attention of IRS auditors. In fact, according to recent reports approximately 30 percent of IRS audits currently focus on the employee versus independent contractor issue.
Although re-classification of a worker most often occurs after an audit, either a worker or an employer can ask the IRS to determine whether the worker is an employee or a nonemployee independent contractor for federal employment tax purposes. The tax laws provide a special, lower federal employment tax rates for misclassified workers in order to increase tax compliance. Unfortunately, the reduced rates are only for prior years’ liabilities attributable to reclassified workers although they are available regardless of who unearths the incorrectly labeled worker.
There are a host of civil penalties for negligent employers who fail to make proper or timely payments and deposits. For any willful failure to withhold or pay employment taxes, penalties and criminal sanctions may apply. Beware however, once the IRS has levied a payroll tax penalty, they can take collection action against the personal assets of any or all “responsible parties.” In other words, if unpaid trust fund recovery penalties — or the employment taxes themselves — cannot be immediately collected from the building business, the IRS can attempt to collect from a so-called “responsible person.”
A responsible person is a person or a group of people who has the duty to perform and the power to direct the collecting, accounting and paying of trust fund taxes. This person may be:
• An officer or employee of a corporation
• A member or employee of a partnership
• A corporate director or shareholder
• Another person with authority and control over funds to direct their disbursement, or
• Another corporation.
Obviously, payroll tax penalties can be devastating. A payroll penalty usually hits businesses that can least afford them, new businesses with weak cash flows, troubled businesses and those that have suffered a casualty. Fortunately, there are steps that every builder and contractor can do to reduce a payroll tax penalty.
The first thing to do is ask the IRS to abate (eliminate) the payroll tax penalty. This is a feasible strategy if the underpayment of the payroll tax deposit is the exception not the rule.
IRS officials also recommend that employers file IRS Form 13460, Employer/Payer Information, as soon as they become aware of an under-reporting or correction issue on Form 1099, W-2, 5498, etc. Not too surprisingly, IRS officials feel it is better to let them know about a problem before they (or the Social Security Administration) begin sending a series of notices on the issue. The form is not available on the IRS website, but can be obtained by calling the IRS at 304-264-5801.
Generally, payroll tax penalties can be avoided by making sure all employment taxes are collected, accounted for and paid to the IRS when required. Obviously, it also helps to understand the rules for withholding payroll taxes — and paying over withheld amounts — on the wages of all the building business’s employees.
The 2010 Tax Relief Act temporarily reduced the employee Social Security withholding tax rate on wages from 6.2 percent to 4.2 percent for one year — 2011. There is some talk of extending this “payroll tax holiday,” making professional assistance and guidance more essential than ever in the coming months – at least for the building business owner or manager wishing to avoid all of the potentially expensive pitfalls. RB
Mark Battersby is an expert in tax and financial matters. With more than 30 years experience in small business issues, he lectures and writes extensively on business topics. Contact him at 610-789-2480 or MEBatt12@Earthlink.net.
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