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4 Steps to Help Your Business Avoid Payroll Tax Penalties


Owing money to the IRS is not an uncommon phenomenon. In 2016, more than 975,000 businesses were assessed a civil penalty for business income taxes, and almost 6 million were assessed a civil penalty for issues with their employment taxes.1

When you’re in that situation, it may feel easier to just ignore the problem entirely.  But this type of issue doesn’t go away on its own. It’s better to arm yourself with the knowledge and tools of a professional payroll and tax organization before the worst case scenario becomes your tax scenario.

Dealing with a tax liability may be anything but simple

Owing the IRS often begins with a lack of payroll knowledge and ends with unknowingly incurring a payroll tax penalty. But remedying a simple tax liability may be anything but simple. It could include spending extensive time and effort following specific steps laid out by the IRS, and dealing the consequences of spending time away from your business, such as the costs of penalties and fines and the inability to focus on generating revenue while dealing with the IRS.

What happens if you owe the IRS money?

If your business ends up owing a tax liability to the IRS, there’s a process you must follow in order to rectify the situation. Generally speaking, a liability is created when a tax return is filed and the tax liability is not paid in full. Shortly after a tax liability is assessed, the IRS establishes an interest in the taxpayer's property. Although this becomes the starting point to most collection cases, things could start to get wildly off track if you don’t understand what the IRS will do next and what steps your business should take in order to ensure a successful resolution to the liability.

When faced with a tax liability, the specific journey each business takes to find financial peace of mind is unique. But when it comes to the IRS collecting on a back tax liability, both the IRS and Congress have created a general path that must be followed through the laws and rules set forth in the Internal Revenue Code2 and Internal Revenue Manual3.

Complying with IRS collections

The most important aspect of taking back some control of the collection process is establishing compliance. If the liability was created by not paying the full amount of taxes owed, the IRS will require that you demonstrate the ability to pay future taxes. So, you’ll benefit by knowing and fulfilling this prerequisite as early in the collection process as is possible.

Establish a plan to repay taxes

Assuming compliance is met, you would need to establish a plan in regards to how you’d want to repay the taxes. It's important to note that the IRS has different rules for collecting against businesses and individuals. Rules also differ for how much is owed in addition to the type of tax owed.

A payment plan is just the beginning

Even after a successful conclusion, there would still be work to do. Sustaining a resolution plan with the IRS is not as easy as simply committing to it. In fact, the IRS itself says that half of all agreements default before the term is up. Business owners must enforce upon themselves certain checks to ensure that the company maintains focus and attention on the issue even after the IRS has moved on.

Try to avoid owing the IRS

To save yourself time and hassle, here are four steps to help keep your business from running afoul of the IRS in the first place:

  1. Ensure your budget accounts for tax payments – Keeping a consistent eye on your budget is crucial. You should be sure that your business can pay all applicable taxes while other important bills are also paid.
  2. Use a professional payroll provider – Despite the need of some business owners to be intimately involved with the functions of maintaining payroll and taxes, doing it in-house is not usually best practice. Consider your options for outsourcing those tasks to a payroll provider with the resources and systems in place to help your business stay compliant.
  3. Monitor compliance – Assumptions sometimes lead businesses into tax problems, so you’ll need to stay aware of your obligations, either on your own or through the support of a payroll provider. Schedule a quick review, coinciding with your payroll frequency, to review every aspect of your payroll process. You can also help ensure that taxes don’t accrue and returns don’t go unfiled by remaining in contact with the IRS and reviewing their transcripts – again, either on your own or ideally through a payroll provider.
  4. Read mail from the IRS – There are many reasons why the IRS may be sending you notices through U.S. mail. Perhaps a payment returned, or maybe the IRS is proposing a tax change or it has no record of receiving a return or payment. By consistently reviewing all mail from the IRS you can feel more confident that any potential tax problems can be resolved before they become actual problems.

Owing money to the IRS is not a pleasant experience. When filing payroll taxes, the best plan is to not need a repayment plan. Rather than risk potential penalties, consider outsourcing your payroll and tax obligations to a legitimate payroll provider. It’s a simple way you can help avoid payroll tax penalties today and keep the IRS out of your business tomorrow.


1. Internal Revenue Service Data Book, 2016, Table 17. Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty, Fiscal Year 2016.

2. Internal Revenue Code, IRS.

3. Internal Revenue Manual, Part 5. Collecting Process, IRS.

Article adapted from: What It’s Like to be in Business and Owe the IRS Money, Staying On Course When your Business Owes the IRS Money, The Path to a Successful Tax Resolution with the IRS, and Five Things to Avoid When It Comes to Owing Taxes, by David F. Miles, E.A.

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