If you forgot to withhold payroll taxes, there might be some hope. The IRS can sometimes be forgiving during times of disaster, grief, or any other circumstances that would cause you to be late withholding payroll taxes. If you don’t have any circumstances that may excuse you from not withholding payroll taxes, the penalties aren’t too steep. Learn more about the rules and regulations regarding the withholding of payroll taxes.

Forgot to Withhold Payroll Taxes: What to Know

Several laws, regulations, and best practices come into play for those who forgot to withhold payroll taxes. If you find yourself in this situation, keeping these factors in mind is essential.

How Do Payroll Taxes Work?

Before understanding the consequences of what happens if you forget to withhold payroll taxes, it’s crucial to reach a functional understanding of how these taxes work. First and foremost, there are several different types of payroll tax. Here are the four main types of federal payroll taxes:

• Federal income taxes: Federal income taxes are a portion of your income paid out to the federal government at a rate decided by your income grouping.
• Social Security taxes: Social security taxes are a set portion of your income (12.4% as of 2022) that are deducted from your paycheck- employers and employees contribute equally, so each party pays 6.2% of that employee’s income.
• Medicare tax: The Medicare tax is a portion of your income taxed at a set rate (2.9%). This tax is paid equally by employer and employee at a rate of 1.45% each, much like the Social Security tax.
• Unemployment tax: The federal unemployment tax differs from the other payroll taxes, as it is not withheld from your employees’ checks. This tax is based on any wages paid to your employees (6% of each employee’s first $7000) but must be paid only by the employer.

It’s important to emphasize that the different types of taxes listed above are strictly federal payroll taxes. In addition, each state has their payroll taxes: some can be higher than others, and some states have no income tax whatsoever.

While the financial burden of payroll taxes lies mainly on the employee, it is still the responsibility of the employer to withhold and pay them forward to the IRS. Before the beginning of each calendar year, employers must declare the schedule at which they will deposit their withholdings from their employees. In the meantime, between deposit dates, these taxes are held by employers in trust. A failure to deposit withheld funds or withhold them is a violation of trust and has several consequences. The severity of these penalties depends on the time you are late on these deposits.

Not included in these details are extra, optional withholdings your employees can opt into. Learn more about these optional withholdings in our 401ks and Roth IRAs blog.

Trust Fund Recovery Penalty

If you forgot to withhold payroll taxes, the TFRP details the consequences and next steps. The Trust Fund Recovery Penalty (TFRP) details the penalty posed to any employer responsible for collecting or withholding payroll taxes and willfully fails to collect or pay them. 

Suppose you fail to withhold or pay an employee’s federal income taxes. In that case, the TFRP dictates that you, the employer, are liable for 100% of the amount of taxes that were due- whether you withheld them or not- plus a percentage interest that increases in rate based on the amount of time that has passed since the payment date. 

The TFRP’s definition of willful failure to pay or withhold payroll taxes does not require criminal, evil, or malicious intent. Instead, their definition of willful is best described as the failure to satisfy legal payroll tax requirements without substantial reason. As such, certain exceptions will be made for employers that fail to comply with payroll tax laws and have a good reason for it. In these instances, employers can appeal to challenge their case.

Hire Canal HR to Administer Payroll For You

No one wants to get in trouble with the IRS. One small mistake can destroy your finances or legal standing. Avoid penalties at all costs. While this is true, sometimes payroll tax withholding and many other employment-based responsibilities can be overwhelming to keep track of.

This is why you should look to outsource these services to a professional. Canal HR is a Professional Employer Organization (PEO) that handles all employment-based services for you: this includes payroll administration, workers’ compensation, benefits packages, risk management, and more. Canal HR has served the southeastern United States for three decades and dutifully serves our clients and their employees. Contact us today or visit our website to learn more about how outsourcing your payroll can help you.