Now that many of us have filed our own federal and state income taxes, one law firm thinks it’s also time to talk about employers’ obligations for employment taxes. Baker Donelson suggests that in tough economic times, employers that have cash flow problems may be tempted to put those tax reports and payments low on their priority lists. Don’t do it, warns the firm.
Baker Donelson reviews the three types of taxes for which employers are responsible: (1) Social Security and Medicare (FICA), (2) unemployment (FUTA), and (3) wage and withholding taxes. All must be both paid and reported by certain deadlines. FICA and withholding taxes must be deposited either biweekly (for organizations that pay more than $50,000 annually in employment taxes) or monthly (for companies that pay less than $50,000). Both the employer and employee portions must be deposited; and, the amounts deposited for both must generally be reported to the Internal Revenue Service (IRS) quarterly, by filing Form 941.
FUTA taxes need to be deposited only quarterly, again including both employer and employee shares of the obligation. If an employer’s state unemployment, or SUTA, taxes include all taxable wages that would be subject to FUTA, the organization will not be obliged to make FUTA deposits. The reporting requirement is that employers show IRS the amounts of their deposits on Form 940 once a year.
IRS can levy hefty fines on employers that don’t deposit and report by the deadlines—and even worse penalties if the agency determines that an employer’s deposits or reports were deliberately delayed or were fraudulently understated. Baker Donelson reminds us that certain individuals within an organization—typically directors, officers, managers, and comptrollers—can be subject to fines if IRS determines that they were “responsible people” who had authority over the employer’s finances or had decision-making authority for the employer. However, their failures to pay the amount of taxes due must be termed willful.
At the employer level, if failures were willful, the organization can be subject to criminal as well as civil penalties, including prison terms for responsible individuals. Even if failures were not willful, civil penalties of up to 25 percent of the tax owed when a tax return is late are enough to put many small organizations out of business.
Tip: If you outsource payroll, ensure that appropriate tax deposits and reports are part of the service agreement, and that HR discusses with the provider how those obligations will be met.