The Snowball Effect of Payroll Taxes
Yesterday, Nonprofit Quarterly released an article titled, “The Worst Financial Decision Ever.” Within it, author Kate Barr addressed the avoidance of payroll taxes, and how putting off the IRS can lead you down a very dangerous road.
We’ve even seen it lead to an organization shutting down as a result of payroll taxes. In this situation, the nonprofit had outsourced to a payroll company. The payroll company eventually stopped depositing the payroll taxes that had been withheld from employees; because they were later unable to withdraw these funds due to a banking message of “insufficient funds” (the nonprofit was using the deposited moneys). Since they were unable to complete a portion of their duties for this reason, the payroll company notified the nonprofit that they were now responsible for submitting and filing their own payroll tax deposits and forms.
- Federal income tax withholding (FITW),
- Social Security and Medicare taxes (FICA), and
- State unemployment taxes (SUTA).
- Wages paid
- Employee earned tips
- Withheld Federal income tax
- The share of Social Security and Medicare taxes paid by both the employer and the employee
- Additional Medicare tax withholdings
Your deposit requirements are not based on how often you make deposits or pay your employees. Instead, your deposit schedule will be determined not only by the size of your organization, but also your total tax liability (the one you reported last year on Form 941). Your deposit schedule will either be monthly or semimonthly. The IRS states in Notice 931, “These schedules tell you when a deposit is due after a tax liability arises (for example, when you have a payday).”
You should determine at the beginning of your calendar year which schedule you are required by the IRS to use. They state (in the same notice) that you are to use your “lookback period” To determine your schedule. “If you are a Form 941 filer, your deposit schedule for a calendar year is determined from the total taxes reported on Forms 941, line 10, in a 4-quarter lookback period. If you reported $50,000 or less of taxes for the lookback period, you are a monthly schedule depositor; if you reported more than $50,000, you are a semiweekly schedule depositor.”
Seems easy enough, and they are nice enough to provide a calendar for 2014 Lookback Periods within the Notice. We’ve saved you a step and posted it below.
July 1, 2012 Oct. 1, 2012 Jan. 1, 2013 Apr.1, 2013
through through through through
Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013 June 30, 2013
What happens if we don’t pay?
- 1-5 days late- you’ll be charged 2% on the amount you owe
- 6-15 days late-that’ll be 5% on the amount you owe
- 16 or more days—you’ll owe 10% extra
- More than 10 days after your FIRST IRS Bill—you’ll still owe your payroll tax plus 15%
- 1-5—$20 fee
- 6-15—$60 to $150 fee
- 16+-- $100 fee
- >10 days after bill--$150 fee
- The IRS can also charge you an additional failure to pay penalty, which is .5% each month that goes unpaid, which increases to 1% after a Notice of Intent to Levy is issued. This fee has a maximum rate of 25% of the amount owed.
- If you forget to file altogether you’ll be issued a 4.5% tax for each month you don’t pay. The maximum fine for this offense is 22.5% of the amount owed.
During this time, interest is also accruing on everything you owe. The government can and will come after your organization to seize any back taxes, and can hold any “responsible person” liable, like they did with the board in our scare tactics example.
How Budgeting Can Help
- Federal income tax rate (which will vary by employee and is based on income amount and tax filing status)
- Social Security of 6.2%
- Medicare tax of 1.45%
- State unemployment tax rate
IRS Notice 931: Deposit Requirements for Employment Taxes
IRS Exempt Organizations: What Are Employment Taxes
The ABCs of FTDs from the IRS
IRS Form 941
Instructions for completing IRS Form 941
“The Worst Financial Decision Ever” Nonprofit Quarterly Article by Kate Barr