Federal law requires U.S. employers to withhold and pay certain taxes on the behalf of their employees. Fail to meet those legal obligations as an employer, and you could face stiff penalties from the IRS. That says nothing of the additional penalties your state may assess. One of the easiest things a company can do to avoid the penalties is to upgrade its payroll system.
It is fair to say that the majority of payroll mistakes are the result of human error. As such, using an outdated payroll system that relies too much on human input is an unnecessary invitation to costly mistakes. A modern payroll system that automates as much as possible reduces the risk of errors and any subsequent penalties that might arise.
The List of Penalties Is Long
So, what exactly is a company up against if it does not handle tax withholding and payments correctly? There is neither the time nor space to fully address the question in this post. To give you an idea though, we turn to a helpful guide published by FindLaw. The guide is entitled “Penalties for Violating Federal Employment Tax Rules“.
Note that this guide deals only with federal withholding and payment of income, Social Security, Medicare, and federal unemployment taxes. There are certainly other taxes companies have to worry about.
As a demonstration of just how complex the law is, FindLaw lists no fewer than 14 violations and the penalties associated with them. For example:
- you will face a 2% fine if your company’s tax deposits are up to five days late
- pay late by 16 days or more, and you are looking at a 10% penalty
- you could be headed to jail for a year should you be caught willfully submitting a false IRS form
- you could be looking at four years in prison for willfully failing to collect or pay federal taxes.
As you can see, the IRS doesn’t mess around. Unfortunately, the burden of proof almost always falls on the taxpayer when an IRS audit uncovers problems. The taxpayer has to prove an honest mistake. Even at that, financial penalties may still be forthcoming.
Upgrading and Outsourcing
We have already talked about upgrading a company’s payroll system to eliminate as much human error is possible. But as long as a company is upgrading, it should also consider outsourcing payroll to a third-party provider. BenefitMall, one such provider based in Dallas, says that outsourcing payroll puts it in the hands of a provider that should know the law inside and out.
Payroll providers make it their business to stay abreast of all federal laws relating to payroll withholding and tax payments. They also keep themselves up to speed on the laws in the states they are active in. It is likely that they know more about tax law than their clients. This is what gives third-party providers an advantage in maintaining payroll compliance.
Not Worth the Risk
We have all heard horror stories of the IRS abusing its tax collecting authority. And while Congress and the administration have done a lot to rein in the IRS in recent years, that doesn’t change the fact that tax prosecutions still take place. It doesn’t change the fact that employers still face financial penalties for honest mistakes.
Quite frankly, continuing with an outdated payroll system is not worth the risk. It is far better to invest in a payroll system upgrade and avoid penalties and prosecutions altogether. Whatever amount it would take to upgrade a system pales in comparison to what an employer could face at the hands of the IRS.