In a recent study by ADP Research Institute, 30% of businesses surveyed have had to deal with unexpected expenses in the form of penalties, fines, and even lawsuits this past year–all because of unintentional non-compliance with government payroll tax and workforce regulations. This is despite the fact that 83% of the business owners surveyed had been confident about their compliance with payroll tax laws and regulations. And 80% expressed similar confidence regarding workforce regulations involving workers’ compensation, 401(k) management and the like.
The study also revealed that close to a third of the firms that had been hit with fines and penalties received more than just one; an average of six, in fact, was reported, with a total average cost of more than $90,000.
Notably, businesses in the study that processed payroll in-house received almost twice as many fines as those using an outsourced payroll service. That’s because these services use advanced payroll systems that catch such errors before they make it to the IRS.
New legislation, such as the Affordable Care Act (ACA), has complicated matters even further; while 70% of business owners felt confident that they were in compliance with the ACA, fewer than half believed their organization fully understood the new regulations. The capabilities of advanced payroll systems are updated with all of the regulations you need to comply with, which can save you from needless worry about forgetting or overlooking some important detail that could cost you money.
Regulatory compliance challenges have greatly increased for businesses of all sizes. The above findings apply to mid-sized firms, but smaller businesses are by no means exempt from the threat of unexpected fines and penalties. The IRS reports that 40% of small businesses pay an average penalty of $845 a year in tax related penalties.
Here are the top six penalties to look out for if you own or manage a small business:
- Failure to file or filing late – If you owe taxes but fail to file by the due date, you could be penalized at a rate of 5% per month, up to a maximum of 25%. Be sure to file your taxes, even if you cannot pay at the time, because the penalty for not filing is steep.
- Failure to pay or paying late – The penalty for failure to pay your taxes is .5% per month on the outstanding tax balance. This penalty can be reduced to .25% a month if you accept an installment agreement to pay back the taxes you owe. However, it can increase to 1% per month if the IRS has issued a notice of intent to levy. This penalty has a maximum of 25%.
- Estimated tax underpayment – The IRS will assess a penalty if you do not pay at least 90% of your estimated taxes for the current year. This amount should be paid in equal installments; you may be hit with a penalty for paying less in earlier months and more later in the year. The best way to avoid these fines is to be sure to pay at least 100% of the amount of your prior year’s tax bill in equal quarterly installments. Make that 110% if your business earns over $150,000.
- Inaccuracy – Tax return errors due to negligence, or significantly understating the amount of taxes you owe, can result in a 20% penalty. For example, if you are audited by the IRS and are unable to provide satisfactory proof for the deductions you have entered, you will face this penalty.
- Tax fraud – This one is huge; if the IRS finds that you have filed your taxes with the intent to commit fraud, intentionally under-reporting your income, you will be charged a 75% tax fraud penalty on the amount that you under-paid. File your taxes accurately and with scrupulous honesty, and you won’t have to worry about this penalty.
- Trust Fund Recovery Penalty (TFRP) – If you have employees, you are required to withhold and pay trust fund taxes. These are simply your payroll taxes, which you essentially hold in trust for your employees until tax time. This includes income tax, federal unemployment tax, Social Security and Medicare. You should be sending these to the IRS each month. The penalty for not doing so is equal to the unpaid balance of the trust fund tax. However, if your total payroll taxes amount to less than $2500 a month, you can file the withholdings quarterly.
- Failure to e-file – If your total amount of payroll taxes exceeds $200,000 in a year you are required to file using the Electronic Federal Tax Payment System (EFTPS). Failure to do so will result in a 10% penalty.
How Advanced Payroll Systems Can Reduce Your Risk
Outsourcing payroll can offer your business a number of advantages, not the least of which is accurate and timely filing of taxes using advanced payroll systems. And most payroll services provide a tax guarantee so you can be assured that your business will incur no tax related fees or penalties. Such providers will take full responsibility in the event that any penalties occur. This cost savings alone can easily justify the price of using an outsourced payroll provider.
Many in-house payroll departments are finding it challenging to keep up with the electronic filing requirement. With their advanced payroll systems, an outsourced payroll provider can also spare you the pain of dealing with the complexities of the EFTPS, which can vary from state to state.
In addition to saving yourself the anxiety of possible penalties due to inaccurate taxes or missed deadlines, an outsourced vendor will keep your company’s payroll accounting organized and up-to-date. Your provider can also relieve your human resources department of some of its more time-consuming processes, such as the administration of retirement plans and other benefits, saving your company additional labor dollars.
Give your business the security and advantages that advanced payroll systems can provide. We have the best, pre-screened vendors who are willing to provide you with free quotes on advanced payroll systems. It only takes two minutes, and there is no obligation, so click here to tell us about your needs and receive up to five free quotes.