If you run a business, you know managing taxes can be an overwhelming endeavour. However, maintaining tax compliance is crucial to your business success, as issues with the IRS can lead to complex payroll tax problems that can take time and money to resolve.
Payroll tax is one of the most important tax responsibilities for businesses to fulfill in order to remain compliant and continue providing benefits such as Social Security, Medicare, and unemployment insurance.
Let’s break down what payroll taxes are, the roles employers and employees play, and how a tax attorney can be your lifeline when problems arise.
What Are Payroll Taxes?
Payroll taxes are taxes that employers commonly deduct from their employees’ paychecks and pay to the government. These taxes, in turn, are used to fund government programs that directly benefit taxpayers, including employees, such as Medicare, Social Security, and unemployment benefits. Payroll taxes differ from income taxes and sales taxes in that they are computed as a percentage of the employee’s wages.
Types of Payroll Taxes
Federal Insurance Contributions Act (FICA)
The FICA payroll taxes are used to support Social Security and Medicare programs. For 2025, the Social Security withholding tax rate is 6.2% for both the employer and the employee, totaling 12.4%. For Medicare, the employer and employee each pay 1.45%, totaling 2.9% for both.
Social Security has a wage limit, which is the maximum wage that is subject to the tax for that year. The 2025 base limit stands at $176,100.
Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax Act is the tax imposed by employers to fund unemployment benefits for workers who lose their jobs. The 2025 FUTA rate is 6.0% for the first $7,000 paid to each employee during the year. Business owners may receive a credit of 5.4% of % state unemployment taxes paid by filing Form 940.
Income Tax Withholding
Income tax withholding is a federal (often state/local) income tax collected from employees’ wages. The amount withheld depends on the amount earned and the information provided on Form W–4.
Employer vs. Employee Responsibilities
In payroll taxes, both employers and employees have responsibilities in ensuring they maintain compliance with the current regulations and prevent payroll tax problems.
Employers’ key responsibilities are:
- To deduct and withhold taxes from employees accurately, in accordance with IRS guidelines.
- File quarterly (Form 941) and annual (Form 940 for FUTA) tax returns with the IRS.
- Pay FUTA.
- Issue W-2 forms to employees by January 31.
- Maintain payroll records in case of audits.
Employees are responsible for:
- Providing accurate information on W-4.
- Contribute to FICA taxes.
- Pay federal and state income taxes through withholding, based on earnings and W-4
- Report any additional income or deductions to ensure accurate reporting.
Common Payroll Tax Problems for Business Owners
1. Late or Missed Payments
Missed or late payments occur when you fail to remit withheld taxes by the deadline. Failing to do so can result in penalties ranging from 2% to 10% of the unpaid tax. Repeated failures can lead to more complex tax issues.
2. Misclassification of Workers
Misclassification, such as classifying employees as independent contractors, can lead to failure to withhold FICA or pay FUTA/SUI. These can result in the IRS imposing back taxes and penalties. Misclassified workers may also lose benefits, such as compensation.
3. Trust Fund Recovery Penalty (TFRP)
The TFRP is the withheld employee taxes (FICA and income taxes) that individuals (business owners) are liable for. Failing to remit this portion of the trust fund can result in 100% of unpaid trust fund taxes, plus interest. It applies to anyone with authority over payroll who “willfully” fails to pay.
4. Payroll Tax Audits
Audits are triggered by a variety of issues, including discrepancies in payroll tax filings, late payments, or worker misclassification. In an audit, the IRS will examine records and ensure accurate calculations. When errors are found, the IRS may impose penalties, interest, and increased scrutiny.
5. Inaccurate Payroll Reporting
Inaccurate reporting may include errors in tax calculations and incorrect W-2 information. These Inaccuracies can be caused by manual filing errors or failing to stay updated on the current tax regulations. Inaccurate reporting may result in penalties and trigger IRS notices.
Consequences of Ignoring Payroll Tax Issues
Ignoring payroll tax problems will undoubtedly exacerbate the issues that can result in hefty interests and fines and initiate aggressive actions from the IRS, such as liens, levies, business license revocation, and asset seizures.
Staying current with tax legislation and keeping proper records allows you to stay on top of your tax obligations, making reporting on your returns easier.
How a Tax Attorney Can Help With Payroll Tax Problems
A tax attorney should be your go-to person when you have any difficulties with your payroll tax and other tax matters. A tax attorney can represent you.
They can help with critical matters, including communication with the IRS, thorough investigation and analysis of your specific cases, and negotiating favorable solutions, such as tax settlements. Remember that when dealing with tax issues, each step is critical to achieving positive results and preventing escalation.
Choose Greenberg Law Group for Payroll Tax Help
If you need payroll tax help, such as resolving payroll tax problems, choose Greenberg Law Group. We navigate a variety of tax issues, ranging from mild to severe tax problems. Contact us today and let us help you stay compliant with the regulations and avoid tax troubles, so you can focus on growing your business.
