Payroll timesheetJust about the biggest business tax no-no that could easily lead to financial disaster is failing to make timely payroll tax deposits and payments.  Payroll tax is comprised of the amounts withheld from an employee’s pay, i.e., Federal income tax, employee’s share of FICA plus the employer’s matching share of FICA.  Each calendar quarter is made up of required deposits.  A required deposit is comprised of payroll tax liability on salary or wages paid to employees over a particular period within the calendar quarter.  Most businesses are required to make either monthly or semiweekly deposits.  Regardless, a delinquent deposit is subject to penalties ranging from 2% to 15% depending on the lateness of the delinquent deposit.

Forms 941, payroll tax returns, are due on the last day of the month following the end of the prior quarter (for example, the first quarter Form 941 is due on or before April 30).  So if with the filing of the Form 941, there is a delinquency in the amount due (the amount owing for the entire quarter minus the sum of the quarter’s deposits actually made plus any payment made with the Form 941), there is an additional penalty of ½ % per month of the deficiency increasing to 1% per month after the IRS has issued a Notice of Intent to Levy with a maximum cumulative penalty of 25%.

So the total cumulative penalty for late deposits and payments could be as high as 40% of the delinquent payroll tax liability.  Obviously, with the addition of accruing interest on the outstanding balance, the rate is even higher.   In the big picture, severely delinquent tax deposits and payments over the course of a calendar year could potentially add 40% + to a business’ payroll expenses.  Because most businesses could not sustain this onerous expenditure, the failure to make timely payroll tax deposits is a sure path to financial ruin.


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