Social Security Tax Penalties

The IRS requires employers to withhold, report and remit payroll taxes from their employees. When they fail to abide by the regulations, they incur penalties and interest on their account. The employer is held liable for any payroll and other income taxes that they fail to withhold or pay to the federal agencies. The employers are responsible for taxes even if they outsource the job of tax compliance to a second party.

What are Unpaid Payroll Tax Penalties?

The IRS outlines many requirements and subsequent penalties for those who fail to abide by these rules in the IRS Publication 15: Employer’s Tax Guide. One of the most common mistakes people make is with the form 941 taxes, which provide guidelines on withholding and FICA taxes.

Common Mistakes

Here are some common mistakes that can lead to unpaid payroll tax penalties:

  • Failure to file form 941 and other similar forms, which results in a ​2 percent​ penalty if you're late by ​one to five days​, a ​5 percent penalty​ if you're late by ​five to 16 days​, or a ​10 percent​ penalty if you're more than ​16 days​ late. ​15 percent​ is the maximum penalty you can incur.
  • Failure by employees to provide essential forms such as W-2 or 1099-NEC. The amount of penalties is determined by several factors, most notably, the size of the company. Large companies will incur larger penalties and vice versa. Other factors that determine the penalty are the type of error and how late the payment was.
  • A trust fund recovery penalty (TFRP) applies when you fail to remit payroll taxes on the due date. The penalty may apply if you collect Medicare, Social Security or income tax and fail to submit them to the federal tax authorities. The penalty is ​100 percent​ of the unpaid tax. Accrued interest is also subject to penalties.

How do Unpaid Payroll Tax Penalties Work?

We’re going to use a practical example to drive the point home. Let’s say you’re supposed to pay $1,000 every month. You fail to make your payment on Feb. 15 but instead deposit $1,500 on March 15 to cover the balance.

What will happen is $1,000 will be applied for March and $500 is applied to February. So, you could be assessed for the payment that wasn’t submitted for Feb. 15.

Employers can also incur fees for unpaid taxes when they classify regular employees as independent contractors. While the IRS doesn’t require employers to withhold income and FICA taxes for independent employees, you could be penalized if the IRS finds out you paid employees as independent contractors when they should have been treated as regular employees.

Payroll Taxes are Trust Fund Taxes

Trust fund taxes are the type that is collected or withheld by a customer of an employer until they pay it to the relevant federal tax agency. Sales and payroll taxes are the most common type of trust fund taxes.

When a customer or employer withholds these taxes and fails to pay on time, the IRS can impose the trust fund recovery penalty. The IRS can impose the TFRP for the following reasons:

  • Willful failure to collect taxes
  • Willful failure to pay taxes
  • Willful attempt to evade the tax payment

Types of Payroll Taxes

They are also known as employment taxes. They include the following:

  • Federal and state income​ taxes are required for employers to withhold from their employees and pay to the appropriate agencies.
  • Social Security and Medicare​ are also known as FICA taxes. They are withheld and matched by employees. They are paid at regular intervals, either bi-weekly or monthly, and reported quarterly on form 941.
  • Federal unemployment taxes​ are paid by the employer based on the gross income of all the employees. They are either paid quarterly or annually and reported on form 940.
  • State unemployment taxes​ are collected and remitted based on individual states’ guidelines.