Blog Post

What Are Payroll Tax Penalties? And, How to Avoid Them.

Published on

September 10, 2020

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Cathy Antle

Tax Penalties occur when there is a failure to pay an employee and/or employer withholding timely.  The way to avoid penalties is to ensure your payments are made according to the schedule set forth by the tax authority. 

There are times when timely payments are not enough to ward off penalties.  On one occasion the company I used to work for received a notice for $993,000 and change.  Wanna talk about something that will raise your blood pressure?  Open that tax notice!

Why did it happen?

An acquisition was reported to the state of Oklahoma almost a year late.  As a result of the acquisition, the Oklahoma state unemployment rate was increased.  The increase itself was not unexpected.  What was unexpected was it was retroactively applied.  The company paid the additional taxes due and Oklahoma waived the penalties but not the interest.  If I recall correctly the additional monies owed were around $33,000.

Then, here comes the $993,00 notice from the IRS for the previous year’s 940 return.  The IRS’s position was Oklahoma unemployment was not paid timely because of the retro increase.  The IRS disallowed the credit for all the monies paid to Oklahoma on the 940 for the entire year.  I had to document the circumstances that caused the acquisition to be reported late.  I also documented that each quarter’s Oklahoma unemployment was paid timely for the year based on the rate that was in effect at the time the return was due.  Patience paid off because I had solid documentation to provide the IRS and was able to get 100% of the P&I abated.

It is not just late payments that can cause tax penalties.  Late reporting of any kind up to and including acquisitions or divestitures can have an impact on the Company's bottom line.  Instead of location, location, a location like in real estate for payroll it is documentation, documentation, and more documentation.

Another significant reason a Company can receive a tax notice is when the deposit schedule changes.  A company may have previously been on a quarterly schedule for tax return filings that can sometimes be changed to a monthly return when the tax liability increases steadily over time.

States are continuously looking for ways to increase their revenue and one way to do this is to introduce more rules and regulations around payroll tax reporting.  A few years back Illinois changed from a quarterly return to monthly reporting as well as a quarterly return.  Illinois is the only state with this particular requirement which resulted in companies receiving large penalties as they struggled with their payroll software to become compliant.

What to do…

The best way to avoid tax penalties is to have experts in tax reporting/payments like CS3 Technology, Inc. handle all your payroll tax needs.  CS3 Technology, Inc. uses Master Tax as its underlying software for tax reporting.  Master Tax has been around for years and is a well-maintained system that keeps track of all those pesky tax reporting updates.

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