Volume 7 Issue 2007

Employers don’t usually think of themselves as tax collectors. But that is their basic function when it comes to the federal taxes they withhold from their employees’ wages. Income taxes and FICA (Social Security and Medicare) taxes that have been withheld are called “trust fund” taxes because employers essentially hold the money in trust for the government until it is paid over to the IRS.

When Payments Are Due

The IRS holds employers to strict payment schedules.

Monthly depositors.

Employers with smaller payrolls generally are classified as monthly depositors and must remit their monthly employment taxes (withholdings plus the employer’s share of FICA) on or before the 15th day of the following month. An employer is considered a monthly depositor for the calendar year if the total amount of employment taxes reported for a “lookback period” (the 12-month period ended the preceding June 30) is $50,000 or less.

Semi-weekly depositors.

Larger employers (those reporting taxes of more than $50,000 during the lookback period) are generally considered semi-weekly depositors. For them, tax deposits are due each Wednesday for wages paid on Wednesday, Thursday, and/or Friday of the previous week. For wages paid on Saturday, Sunday, Monday, and/or Tuesday, the payment deadline is the following Friday.

Special rules.

If an employer has accumulated $100,000 or more of employment taxes, the deposit has to be made by the close of the next banking day (“one-day rule”). The day after a monthly depositor becomes subject to the one-day rule it becomes a semi-weekly depositor for the remainder of the calendar year and for the following calendar year.

With less than $2,500 of accumulated taxes for a quarterly or annual return period, the full amount can be paid with a timely filed return.

An Obligation Employers Shouldn’t Neglect

When money is tight, employers sometimes pay other bills and delay depositing tax withholdings. However, a decision to pay late can have serious repercussions for the business. Penalties are harsh and can add up quickly. For example, if a deposit is late by just 16 days, the penalty is generally 10% of the amount due (the equivalent of 228% per annum).

If an employer fails to pay, the IRS may pursue not just the company, but also its officers, employees, and any other person who is responsible for collecting, accounting for, and paying over the company’s payroll taxes. The penalty for willfully failing to turn over the taxes to the government is known as the 100% trust fund recovery penalty because it is equal to 100% of the unpaid taxes.

Case in Point

In a recent case, the sole owner of a limited liability company (LLC) was found to be personally liable for the company’s unpaid payroll taxes. Under the tax law’s “check-the-box” regulations, the owner could have elected to have the LLC treated as a corporation for tax purposes but did not. As a result, the business was treated as a sole proprietorship. (Sole proprietors are taxed on business income at the personal level.) The owner argued that the assessment against him personally was impermissible because it violated the limited liability he was entitled to under state law. But the court didn’t buy it, noting that state laws of incorporation may affect, but do not necessarily control, federal tax provisions.

Clearly, employers need to pay close attention to the employment-tax rules. If you have any questions, please discuss them with us.