This post is intended for US employers. Click here for the Canadian version.
Letters from the IRS are never fun. What makes it worse is not knowing why you got one in the first place.
When it comes to payroll tax payments and potential fees, you want to get to the heart of the issue ASAP. But first, take a deep breath... It's likely that you missed a simple step when you were getting started.
A Quick Recap of US Payroll Taxes
Before we discuss any IRS notifications or love letters from a state or local tax authority, let's do a quick review of payroll taxes. We'll just be hitting the highlights here.
Employers in the United States are responsible for several levels of payroll taxes. Federal, state, and local taxes all apply to your business. They can also include multiple agencies if you operate in more than one location.
Federal payroll taxes include:
- Federal Income Tax
- Medicare and Social Security (FICA)
- Federal Unemployment Tax (FUTA)
State payroll taxes include:
- State Income Tax
- State Unemployment Insurance (SUI)
Local payroll taxes include:
- Income, school board, transit, etc.
Reporting Payroll Taxes
Not only do all these taxes need to be collected and paid to the correct tax authorities — they also need to be reported to them as well. Each type of payroll tax is reported using specific forms, listed below. If you're using a payroll provider, it's likely that these reports are automatically generated as part of your paid service.
Federal payroll tax reports include:
- Form 941 (quarterly) — federal income tax, tipped wages, Medicare, and Social Security.
- Form 940 (annually) — federal unemployment tax (FUTA).
State payroll tax reporting:
State authorities require wage detail reports on a quarterly basis. Each state sets the form and requirements for these. If you have multiple locations in different states, be sure to follow the reporting requirements for each state.
Local payroll tax reporting:
Like states, local reporting is set by local tax agencies. The reporting timeline can vary from your federal and state requirements.
Year-end payroll tax reporting:
Along with overall reporting throughout the year, employers must also provide W2s to employees (1099s to contractors) and tax agencies for year-end. These are due to the agencies and employees by January 31 of the tax year and will be used in tax filing the following spring.
What To Do When You Get a Payroll Tax Notice
With all the reporting to keep up with, you may end up making a small mistake that results in a payroll tax notice from one of the many tax agencies. Luckily, if you're using a payroll provider fixing those mistakes can be as simple as re-entering some data. Review these common questions to see if any of these quick fixes apply to you.
9 Tax Details to Check Within Your Payroll Setup
If you're using payroll software, many of your payroll tax responsibilities may be taken care of already — like generating reports and remitting payments.
While this is a great feature, you as the employer are still responsible for any issues that may arise — and many of those issues stem from entering the wrong data into your software.
Keep in mind that all payroll software is slightly different, but the following checklist covers many of the basics. You should always confirm with your provider so you're clear on what your tax responsibilities are throughout the year.
1. Verify All Your Payroll Tax IDs
Each federal, state, and local tax authority assigns you an ID number for payment and reporting when you register your business. Check that your account numbers are entered fully and correctly.
- Federal — FEIN number
- State — SUI accounts, withholding accounts, other relevant tax authorities
- Local — specific to local tax authorities
2. Make Sure You Don't Have "Applied For" Listed for Any of Your State Tax IDs
State tax agencies will provide you with a valid tax ID after you register your business with them. Most will allow you to list "Applied for" in your payroll software in place of your state tax ID while you are in the registration process.
You may only list "Applied for" during registration and must replace it with the correct ID number as soon as you receive it.
If you don't provide the correct ID within a reasonable timeframe, your payments can't be credited to your account and your reporting can't be properly associated with your business. When left unresolved, this will trigger a tax notice.
Note: CA, CO, FL, IN, LA, MA, MD, MN, NE, NY, TX, or WI do not accept "Applied for" as a state tax ID. In this case, your payroll provider will not be able to send any payments or file any compliance forms until you receive and enter your correct ID after registering.
3. Confirm Your Payroll Tax Remittance Schedules
Once you register your business with a tax authority, you will also be given a filing frequency (remittance schedule) that specifies the timing for your payments and reporting.
If your tax liability increases or decreases during the year, your frequency may change. When this happens, you will receive a notification from the tax authority.
If you get a letter notifying you of remittance and/or reporting frequency change, be sure to apply this change to your payroll setup. If you're uncertain or have questions, speak with a support expert to help walk you through it.
4. Double-Check Your FUTA and SUTA Withholding Rates
Each state has its own unemployment tax rate that applies to your business. Most payroll software will use default rates — SUTA 5.4% and FUTA 0.6%. Before using the default rates, make sure you don't fall into a different rate category. If you have multiple locations in different states, you will need to check the rates for each state.
5. Pay Attention to the Timing of the Tax Notice
If you just started using payroll software or recently switched providers, you need to keep track of exactly when you started using your current software. Timing is key.
If your payroll tax notice was generated before you started with your payroll provider, you are most likely liable for those penalties. As a course of business, most payroll providers will not fix tax issues and penalties that occurred before you became a customer.
If you switched payroll providers and the notice was generated before you switched, check with your previous provider or accountant to see if they can help with next steps.
If you notice the dates are wrong on the letter, you might have simply entered the wrong pay periods when registering with the specific tax authority. Your best bet is to contact the specific tax authority to find out the best way to address the problem.
6. Verify Your Year-to-Date Records are Accurate
It's important to keep records of all your payroll information for each pay period, even before you start using a payroll provider. Those records are necessary for paying taxes, and they also help you onboard quickly and accurately should you decide to use payroll software.
The term for tracking your current payroll tax payment and reporting obligations is your "year-to-date" information. If this is correct, then you'll be on track. If it's not, expect some mail.
7. Verify the Information on Your Tax Forms
If you receive a payroll tax notice from the Social Security Administration (SSA), there are two common reasons this could occur:
- Your year-end forms did not match the totals on your employees' W2s and W3s — If the error was made on Form 941, you must submit a 941-X correction form to amend the original document. If the error was made on a W2 or W3, you have to submit a W2-C or W3-C correction form to amend the original document.
- One of your employee's Social Security Numbers (SSNs) is incorrect — If the SSN is only incorrect in your payroll software, you should be able to re-enter it and be good to go. If the SSN is also incorrect on the employee's W2 or W3, you will need to file a W2-C or W3-C to make the correction.
8. Determine if You Require A Third-Party Authorization (TPA)
Some states require that you list your payroll provider as a third party, granting the provider authorization to access your tax data and make payments on behalf of your business.
Massachusetts, Minnesota, New Mexico, Nevada, Pennsylvania, and Washington, D.C. require TPAs for SUTA. Massachusetts and Ohio require a TPA for Withholding.
If you don't authorize your payroll provider with these tax agencies, they cannot make payments or file your tax forms and you as the employer will be responsible for taking care of it yourself.
9. Confirm Your Payment Amounts and Dates
Even if you made your payment on time, sometimes tax agencies can accidentally post the check or credit to the incorrect tax ID or period.
Call the tax agency and provide them with the canceled check (for physical payments) or tracer number (for electronic payments) to document that your payment was made for the correct amount and period.
Next Steps After Checking Your Setup Details
Your payroll tax notice should tell you the next steps for resolving concerns. Usually, notices are generated simply to pass on information. However, if action is needed, it often just means making an additional payment to avoid further fees or filing a correction form.
If you have a reasonable cause for not paying payroll taxes, the penalties will not apply. In this case, you must provide an explanation of why you believe you have a reasonable cause.
If you're a new employer or simply made an innocent mistake, the tax authorities might waive any penalties or fines — as long as you've shown an earnest attempt to resolve the problem.
Above All — Don't Panic!
While payroll taxes can be confusing — especially if it's your first time filing as a new business — know that there are ways to catch small mistakes before they turn into bigger complications.
So if a tax notice arrives in your mailbox, take a deep breath and run through this checklist before you let worry set in. If you're using payroll software, most tax authorities will consider this as proof of your intent to do the right thing.
There's a perfect world and a real world. Mistakes and gaps in communication happen. But, they can be fixed.
The information we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.
About the AuthorMore Content by Ralph Eovino