And there are many ways to incur those penalties. Violating federal employment tax rules is very serious business – and not just for employers – employees will suffer as well.
Both employers and employees hold the responsibility for collecting and remitting withholding taxes to the IRS. In most cases, the employer withholds these taxes on behalf of their employees, but in cases where an employer does not do this, or where an employee is self-employed, it is the responsibility of the employee to pay these withholding taxes.
Employers may be subject to criminal and civil sanctions for willfully failing to pay employment taxes. Employees suffer because they may not qualify for social security, Medicare, or unemployment benefits when employers do not report or pay employment and unemployment taxes. Consequently, taxes withheld and paid by compliant employers are used to pay the refunds and social security benefits of employees whose employers did not pay the withheld taxes. Here's a link to an expanded explanation from the IRS.
The issues for employers are much more significant since any unpaid employee withholding taxes are going to be a matter of willful intent. Most employees have no idea that their employer may have ignored paying taxes on the employee's behalf. As an employer, it's your responsibility to withhold, deposit, report, and pay federal employment taxes for your employees. The federal employment tax is made up of 3 components: federal income tax; the Federal Insurance Contributions Act (FICA), more commonly known as the Social Security and Medicare tax); and the Federal Unemployment Tax Act (FUTA), which is the unemployment tax.
Employers failing to withhold, deposit, report, or pay these taxes can incur harsh penalties including potential criminal liability, large fines, and jail time. Violating federal employment tax rules is very serious business! Here's just a partial list of possible penalties you and/or your business could suffer if you fail to follow the federal tax laws:
- If your federal employment tax deposit is one to five days late, the IRS will impose a 2% penalty.
- In case your deposit is six to fifteen days overdue, you will be charged a 5% penalty.
- If your deposit is late by sixteen days or more, a 10% penalty is imposed.
- If the IRS sends you a notice stating that you owe federal employment taxes and you pay the deposit directly to the IRS – or to an unauthorized institution – within ten days of the notice, you'll be charged a 10% percent penalty (this is in cases where you do not use EFTPS when required).
- In the event that the IRS sends you a notice stating that you owe the taxes but you wait more than ten days before complying, there is a 15% penalty.
- For every month or partial month that you fail to file a return, the IRS imposes a penalty of 5% of what the return should have shown, up to a cap of 25%.
- For every month or partial month that you withhold federal employment taxes but pay them late, the IRS imposes a penalty of 0.5% of the tax amount, up to a cap of 25%.
- In case you don't withhold income and FICA taxes as you are required to do, or if you withhold the taxes but don't pay them to the IRS, the IRS is authorized to penalize you up to 100% of the taxes owing.
- If you willfully try to evade the federal employment taxes, you are committing a felony and can be punished by a fine, and you could be imprisoned for up to five years.
- In the event that you willfully fail to collect or pay to the IRS any federal employment tax, you are committing a felony and can be fined and you could go to prison for years.
- If you willfully fail to file a return, keep federal employment tax records, or give the IRS information it requires, you are committing a misdemeanor and face a steep financial penalty, and you could go to jail for a year.
- In case you willfully submit a false IRS form you could be fined and go to jail for up to one year.
- If you are the person responsible for withholding, collecting, accounting for, and paying the federal employment taxes and you willfully sign or submit a document that you know contains false statements, you have committed a felony and could face a financial penalty and imprisonment for many years.
All that said, mistakes do happen, and those are not considered tax evasion. In order to be convicted of federal employment tax evasion, the IRS must show that you deliberately and willfully failed to submit your employees withholding taxes. If you simply made an error, you’ll still have to pay what you should have paid, and possibly an additional fine, but you’ll avoid the time, expense, and penalties of a criminal trial. But errors of that kind are fairly rare.
What's much more common is the willful evasion of paying federal employment taxes and that is punishable in all the ways discussed here.
If you happen to have made that unfortunate error in judgment – or if you've been accused by the IRS of violating federal employment tax rules, and perhaps it was done by someone else within your organization without your knowledge – you need a qualified Tax Attorney like myself to represent you to the IRS. My Team and I can effectively negotiate the best outcome possible for your specific situation. Only a qualified Tax Attorney can do that, and it's why I'm here. We've gone to bat for many clients needing an attorney's intervention for tax crimes and we hit home runs almost every time.
Talk to me if you're in the kind of hot water described here: I guarantee you won't find anyone more qualified to help you through that mess. Click on this link to schedule a consultation. You also can email me at Larry@TaxProblemSolver.com or call me at 855-232-5752.
