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Avoid These Common Payroll Tax Mistakes


Doing in-house payroll means complying with strict IRS rules and regulations to avoid penalties and interest. Protect yourself and your business by avoiding these four common mistakes.

  1. Filing late – The IRS stipulates a due date for depositing taxes. Failure to meet this date may result in up to a 10 percent failure-to-deposit penalty, based on your total payroll tax amount. The filing deadline date is based on total payroll.

    A late payroll tax return also incurs penalties. For each partial or total month that a return is not filed, you can receive a 5 percent failure-to-file penalty. The penalty is based on your unpaid tax bill.

  2. Filling out Forms Incorrectly - Filling out forms correctly helps avoid over or underpaying payroll taxes. It also helps with reconciling your W-2s to year-end tax returns. Before you submit your return, double check your figures, add the columns to verify totals, place amounts on correct lines, make certain each line item coincides with your financial statements and payroll reports, and make sure your return is signed. Avoid receiving IRS communications by submitting complete and correct returns.

  3. Submitting Incorrect Amounts - If you submit the wrong amount of payroll tax deposits, the IRS may penalize you. However, the penalty will not apply if the failure to submit correct amounts is due to a reasonable cause and not willful neglect. The IRS may also waive your penalty if this is the first penalty you have received. This one-time abatement is helpful to new employers who inadvertently make an error. The penalty starts accruing on the due date of your payroll taxes. Penalties range from 2 to 10 percent, depending on how late they are after the due date.

  4. Misclassifying Employees - Misclassifying employees is a common payroll tax mistake. You are responsible for withholding payroll taxes from statutory employees, those you exercise a certain degree of control over. Control may include defining their work hours, supplying their equipment and tools necessary to complete the task, determining how work is to be done and deciding what needs to be done. Terminology does not matter when classifying the employer-employee relationship for payroll tax purposes. An independent contractor is not subject to employer payroll tax withholding.

Making the mistake of misclassifying employees as independent contractors can result in you being responsible for paying back payroll taxes. Additional tax penalties depend upon whether you filed appropriate and timely returns, paid certain payroll taxes to the exclusion of others, and/or intentionally did so.

The best way to avoid making these common payroll tax mistakes is to obtain a copy of the IRS Publication known as Circular E. Consider this the payroll bible and use it as a valuable resource to minimize exposure when faced with legal ramifications.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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