By Mark D. Zinn

As an employer, you must withhold from an employee’s pay money to cover the employee’s federal income tax liability, Social Security and Medicare taxes.

The combination of the employee’s withheld federal income, Social Security and Medicare taxes are called “trust taxes.” The reason for this designation is that the money belongs to the employee, since it is withheld directly from his or her pay. The employer is legally responsible to accurately withhold, account for and pay the required amounts to the IRS on the employee’s behalf.

Both the employee’s share and the employer’s share of employment taxes are reported on Form 941, Employer’s Quarterly Federal Tax Return. Form 941 is required to be filed no later than one month after the close of the calendar quarter.

Withholding Responsibilities

Each employee must complete a Form W-4, “Employees Withholding Allowance Certificate.” Use the employee’s gross wages and the information on the W-4 to figure the amount to withhold. If an employee doesn’t give you a signed W-4, withhold tax at the single rate with no withholding allowances.

If an employee claims to be exempt from withholding, the exemption only applies to income tax, not to Social Security or Medicare—the FICA taxes. And, employees claiming exemption from withholding must submit a new W-4 each year by Feb. 15, to re-establish their exempt status.

Wages that are subject to federal employment taxes include all payments you give an employee for services performed. The pay may be in cash or in other forms (i.e., salaries, vacation pay, bonuses, commissions and certain fringe benefits). However, not all employee compensation is considered wages.

            For example, if you pay the cost of an accident or health insurance plan for your employees, these payments are not wages and are not subject to tax. Also, if you reimburse an employee for business expenses under an “accountable plan,” those amounts are not wages and are not subject to tax. However, payments to employees for necessary business expenses under a “non-accountable plan” are deemed supplemental wages subject to employment taxes.

An accountable plan is a reimbursement or allowance arrangement between you and your employee that meets all three of the following rules: 1) Your employee must pay for deductible expenses while performing services as your employee, 2) the employee must account for those expenses, and 3) return to you any advanced amounts that are more than the actual expenses within a reasonable period.

            If an employee is not required to, or does not account for expenses in a timely manner, you have a non-accountable plan. It is also a non-accountable plan if you advance an amount to the employee for business expenses and that employee is not required to return, or does not return, any amounts not used for business expenses.

Figuring Payroll for Employees

            To figure payroll, you must first determine the total amount of compensation and benefits included in each employee’s wages for the pay period. The next step is to figure the amount of income tax to withhold from each employee. The two most common methods are the “wage bracket method” and the “percentage method.”

            For Social Security and Medicare taxes, simply multiply the total wage by the applicable employee Social Security and Medicare tax percentages. As the employer, you also pay a matching amount.

            The amount of wages subject to Social Security withholding changes each year. You do not have to withhold any more Social Security taxes once the employee’s wages have reached that limit. This “wage base limit” is published annually in Publication 15.

            There is no wage limit for Medicare taxes, so all wages are subject to withholding and, just like Social Security taxes, the employer must pay a matching amount.

Depositing and Filing Payroll Taxes

            You pay your payroll taxes to the IRS by depositing them directly with the U.S. Treasury. You can do this through your bank or through the Electronic Federal Tax Payment System. How often you pay these taxes depends on the type of tax and the amount.

            The best time to make a tax deposit is the same day you pay your employees. You can deposit anytime up through the deposit due date, but if you deposit late, penalties kick in.

So, what are the due dates? If the payroll tax is less than $2,500 for the quarter, you can pay it with your Form 941, “Employer’s Quarterly Federal Tax Return.” If the payroll tax is $2,500 or more for the quarter, your deposit is based either on a monthly or semi-weekly schedule.

Mark D. Zinn, J.D., L.L.M., is an attorney with the Zinn Law Firm, P.A. You can reach him at (913) 262-4829, or, on the web at, www.zinnlawfirm.com

“Substitute for Return” is the term the IRS uses for the return they file for you, if you do not file one for any given year.  The most important thing to note is, it is never beneficial to have the IRS file a return for you.

First, the IRS will not spend time reviewing what deductions you should receive.   They will simply give you a standard deduction, whether or not you have excess deductions which would warrant filing a Schedule A.  Therefore, if you own a home, and pay interest that exceeds your standard deduction (which is almost always the case), you will not receive that benefit if the IRS files your return for you.  As a result, your taxable income, and resulting tax liability, will be higher than it should be.

Secondly, the IRS will classify you as, “married filing separately”, which is the least favorable category, since the standard deduction is lower.

The bottom line is, even if you know that you won’t be able to pay any amount due, you still need to file your own return, so that you will have an accurate assessment of what is due.  And, if you don’t believe you will owe any tax, you need to file a return to show the IRS that you don’t.  If they have to file one for you, the SFR will likely show that you do have a tax liability.

Section 6331(a) of the Internal Revenue Code authorizes the IRS to administratively collect federal tax liabilities by levy, while a federal tax lien is in effect.  Because the IRS can do this without a court order, it is critical to know when the IRS will take action to enforce this power and, more importantly, what you can do to prevent it.

The IRS is supposed to send out three notices before levying on a taxpayer’s property.  The first notice is a demand for payment within ten days.  The second notice is a notice of intent to levy.  And, the third letter is a final notice of intent to levy and right to appeal.  When this final notice is received, the IRS is very close to taking some levy action.

While there are ways to prevent a levy, ignoring the notices is not one of them.  At a minimum, a taxpayer should call the phone number provided on the letters received to let the IRS know that you are paying attention and taking your tax debt very seriously.  However, when you call, the IRS representative with whom you speak is going to ask questions to find out how the amount you owe is going to be collected.  So, be extremely careful about what information, if any, you provide.

A company’s liability for payroll taxes is twofold: first, the company is responsible for withholding one-half (7.65%) of the total liability (15.3%); secondly, the company is also responsible for matching that withholding with the other half.

The part withheld is called the trust fund portion because it is the employee’s money, and should be held in trust.  Unfortunately, when bills need to be paid, and cash is not abundant, many companies  “borrow” from the money withheld from their employees, planning to pay it back when business picks up.

Often, however, business does not pick up, and the problem continues to grow until it is completely un-curable.  The IRS does not hesitate to shut companies down for this type of issue.  And, if the company is shut down, whether voluntarily by the owner, or involuntarily by the IRS, someone from the former company is going to be held liable for the part of the payroll tax that was withheld from the employee’s paychecks.  This liability is called the Trust Fund Penalty and attaches personally to anyone who had responsibility to pay the withheld money over to the IRS.

In many small companies, the owner will be that person.  However, the IRS will also attempt to hold liable anyone who had the ability to sign checks.  So, if the company has a Treasurer, who’s responsibility it is to pay bills, that person could be held “jointly and severally liable” for the TFP.  Further, if a Vice President, for example, signed one check while the person with that responsibility was out of town, the IRS will certainly attempt to hold that person liable.

Joint and severable liability means that all responsible parties are jointly liable, and each party is individually liable.   And, again, the TFP is something that does not go away when the company does.

On the other hand, the portion that the company was supposed to match is a liability that is extinguished when the company is closed.  Therefore, doing so voluntarily is sometimes a viable option.

Hardship Status (the IRS’ term is “Currently-Not-Collectible”) is a last resort, temporary remedy for some of my clients.

The only time it is worthwhile is when a taxpayer owes a substantial amount of tax, penalty and interest, is unable to pay-in-full, is unlikely to qualify for an Offer-In-Compromise, and cannot even make the minimum monthly payments required by the IRS under a formal Installment Agreement.  Further, the taxpayer must be certain that their ability to make payments will improve in the near future.

If Hardship Status is granted by the IRS, a lien will be filed if not already, and collection will be put on hold.  However, penalties and interest will continue to accrue, making this the least favorable of alternatives.  If granted, the hardship status will last for 12 – 14 months, at which time the taxpayer must “re-qualify” for the same status, if necessary. 

To qualify, the taxpayer will show the IRS that their monthly income is exceeded by their monthly expenses.  If that is not the case, but, the amount left-over is minimal, the taxpayer may still qualify.  The key factor is that the taxpayer cannot pay what the IRS requires on a monthly basis.

The ideal situation for a taxpayer considering Hardship/Currently-Not-Collectible Status is when there has been a significant drop in the taxpayer’s income, which will be corrected within the next 12 -14 months.  Also, if the taxpayer expects to receive a bonus from their employer, or a distribution from an estate for which they are a beneficiary, Hardship Status will create some time for those contingencies to occur, at which time the taxpayer can then, hopefully, pay their tax debt in-full.

Installment Agreements are the most common resolution to all IRS problems.  These can be extremely simple to complete, or, somewhat  difficult, depending on the total amount owed.

If your total outstanding tax debt is less than $10,000, the IRS is required to allow you to enter into an Installment Agreement , provided that you have not failed to file any tax returns or already entered into an Installment Agreement, on which you defaulted.  However, the amount you offer to pay per month must be enough to pay the entire debt in three (3) years.  There is no financial statement required for these simplified versions, which is a big time-saver.

If the total amount you owe to the IRS is over $10,000, but less than $25,000, the IRS will generally allow an Installment Agreement, provided that you can pay the entire amount off in five (5) years.  While there is normally no financial statement required for these, either, the IRS may require at least a Form 433-F Financial Statement.

Negotiated Installment Agreements may be used to pay-off IRS debts totaling more than $25,000.  In this situation, the IRS will require at least a Form 433-F.  However, they may require the more detailed Form 433-A, generally if the total exceeds $50,000.  You will be required to make monthly payments equal to an amount which will ensure that the total is paid-off in five (5) years.  Also, since the Statute of Limitations on collection of taxes is ten (10) years, the IRS may require you to extend that period, if your Installment Agreement will not be completed when the existing limitation expires.

In using any Installment Agreement, regardless of the amount you owe, remember to only agree to a monthly payment that you know you can afford.  And, be conservative.  When a client tells me what they can pay per month, I generally reduce that amount by 25%.  The consequences for agreeing to pay more than your finances allow can be extremely detrimental, since it is nearly impossible to convince the IRS to re-negotiate an existing Installment Agreement.