Understanding Payroll Tax Notices: What They Are and How to Keep Them Under Control
Payroll taxes are an essential and unavoidable part of doing business. Even if you outsource to a payroll processor, it is still on you to correctly remit payroll taxes. A processor can save you time by telling you what to send.
Any mistakes with your payroll can elicit a payroll tax notice, as can any issues or updates. These notices may come from the IRS or your state, and it's vital not to ignore them as they may indicate that you owe taxes, and not paying them can result in late fees and penalties.
Understanding Payroll Taxes
Payroll tax is a generic term for any taxes you must withhold from an employee's check. Another term used is employment tax. Payroll taxes include:
- Federal income tax
- Social Security and Medicare tax
- Additional Medicare tax (this is only for employees earning more than $200,000)
- Federal unemployment tax (FUTA)
- State income tax
- State unemployment tax (SUTA)
- Possibly local taxes if your in one of those states that use them.
Note that FUTA and SUTA are paid from your funds, not withheld, but they are still considered payroll taxes. Not correctly withholding and paying this tax can lead to fines and penalties. It can also lead to problems for your employees. For example, if you fail to withhold taxes the employee owes in the month they owe it, you must collect it in subsequent months.
If your employee failed to notice the incorrect withholding and spent that money, then faced hardship when the employer had to remove it from a subsequent check. Alternatively, you can cause problems if you inadvertently take too much money from an employee's check and they cannot cover their rent or mortgage that month.
Mistakes like these impact employee morale by making your company look less capable. Furthermore, failing to remit payroll tax payments on time incurs penalties and fees.
Types of Payroll Tax Notices
Payroll tax errors are commonplace. In 2021, the IRS assessed over 6 billion in civil penalties related to employment taxes. Tax notices are sent out when there is an issue or discrepancy with your payroll taxes. Because of this, you must review and respond to notices swiftly. Ignoring them can result in you being assessed penalties.
The most common types are:
- Notice of Penalty Assessment – means that you have been assessed a penalty. If you receive one of these, verify that the information is correct. Sometimes they are wrong and must be disputed. Your accountant may also be able to help resolve the situation without you having to pay. You can request that the penalty be removed or, if rejected, request an appeal.
- Notice of Delinquent Tax Return – if you did not remit payroll taxes on time, you must pay immediately to avoid a penalty. Ensure you have a system developed to ensure payroll taxes are always paid on time.
- Notice of Proposed Assessment – this is an estimate sent by the IRS of what you might owe if you did not pay your payroll taxes. If not responded to, it can become final, even if it is wrong—or very wrong.
- Notice of Audit – indicates you may be facing a payroll tax audit. Talk to your accountant immediately, as there may be ways to stave off the audit; if not, you must prepare for it.
- Credit Balance or Tax Due – this means you paid too much tax and will be getting a credit, or you paid too little and need to send the IRS more money.
- State Unemployment Rate Assignments – These indicate a change in your state unemployment insurance rate, which typically changes yearly. You need this information to pay SUTA properly.
- Filing Frequency Changes – some taxes are paid quarterly, some annually, and some by different schedules. For example, employment taxes may be deposited monthly or semi-weekly, which can change depending on your total tax liability. State filing frequencies may differ, and it is not uncommon for them to change yearly.
Some tax notices are just an FYI, but most employment tax-related notices are something you need to do something about. Changes may happen because you hit a threshold in terms of revenue or tax due. They may also occur because you have employees in a new jurisdiction or have lost employees in a jurisdiction (this is often an issue if you are near a state border).
How to Manage Payroll Tax Notices
Organization is crucial to staying on top of these notices. They often become lost and may not end up on the right person's desk. Automation software helps by routing notices to the correct person and ensuring they know about them. Maintaining proper documentation also means you can respond to notices immediately, and if you need to appeal a penalty, you are ready to do so.
Organization is the best way to manage payroll tax notices. Using software such as NOTICENINJA can help you stay organized and respond to penalties quickly.