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Fear the payroll tax reaper

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in Small Business Tax,Small Business Tax Deduction Strategies

The so-called “100% tax penalty” is one of the most-dreaded provisions in the entire tax law. If you’re held responsible for unpaid federal payroll taxes that were withheld from employee paychecks, you may be personally liable for 100% of the unpaid amount.

In other words, you have to pay the full amount out of your own pocket!

Strategy: Make absolutely certain that Uncle Sam is paid on time. Circle the payroll deposit due dates on your desk calendar, Outlook calendar or use some other visible reminder. Keep your copy of our federal tax calendar handy to stay up-to-date with the due dates.

What’s more, you’re not off the hook if you simply delegate the job to someone else. You may still be held personally liable if you thought the withheld payroll taxes had been paid to the feds on time. Liability may be avoided only if you can show that your failure to deposit the taxes was due to “reasonable cause” and not “willful neglect.”  

The IRS will likely leave no stone unturned in its effort to collect unpaid payroll taxes that were withheld from employee checks.

New case: The IRS determined that a taxpayer was responsible for his company’s unpaid payroll taxes. When he later filed his 2007 tax return, he asked to have his refund credited toward his estimated tax liability for the 2008 tax year. But the IRS used the refund to help pay the payroll tax bill. Now the Tax Court says the IRS is allowed to do so. (Weber, 138 TC No. 18, 5/7/12)

Follow these safeguards:

  • Have one employee responsible for paying the withheld taxes and another employee to verify that payment has been made.
  • Assign backups to both employees in case of illness, vacations or other absences.
  • Require a report to be issued to you (in paper or email) stating that the responsibility has been completed.

Tip: Make it your personal business to check to see that deposits of withheld payroll taxes have been made on time.

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