Payroll Tax Penalties

April 13, 2006

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In the area of payroll taxes, there really aren't too many opportunities for reducing your exposure to the taxes themselves. If you hire employees and pay them any kind of compensation, it's a given that you're going to have some payroll tax liabilities. Perhaps your biggest opportunity for realizing any kind of real savings is to make sure you tend to each of your obligations and avoid getting hit with stiff penalties.

Many of the potential payroll tax penalties are the same ones you'll find when you're dealing with other types of taxes. For example, there are both criminal and civil penalties for failing to timely file payroll tax returns or to timely deposit taxes you owe. However, there are a couple of penalties of which you should be particularly mindful as you deal with your payroll tax obligations:

100 percent penalty. The biggest risk you face in administering your payroll tax obligations is that you can be held personally liable for all income and FICA taxes that you willfully either fail to withhold from your employees' wages or fail to pay to the IRS and your state tax agencies. Even if you avoid the 100-percent penalty because your conduct wasn't "willful," you could face smaller penalties if your failure to withhold was due to your misclassification of an employee as an independent contractor. In the context of tax penalties, willfulness requires that the individual's conduct be intentional, knowing, and voluntary. In some cases, a reckless disregard of obvious facts will suffice to show willfulness.
Form W-2. If you fail to prepare a Form W-2 for your employees, or if you willfully furnish incorrect ones, you will be subject to a $50 penalty for each statement that should have been sent or that was incorrectly prepared.