When you started your business, you knew that you would have a significant amount of paperwork to take care of, including payroll for your employees. Part of your responsibilities when it comes to paying your employees is making sure that you submit the appropriate amount of payroll taxes to Connecticut taxing authorities and the IRS.
Payroll taxes encompass several different types of taxes that you are obligated to collect from your employees. Knowing what to collect, along with how much to collect, is only the first step. You are then responsible for paying those amounts to the IRS and the state.
What taxes to collect
Before even considering what taxes to collect, it's important to be sure that you correctly classify your employees. Many small businesses make the mistake of classifying those who work for you as independent contractors, for whom you do not collect payroll taxes, instead of classifying them as employees, for whom you do collect payroll taxes. Failing to accurately classify employees could get you into trouble with the IRS as well.
For your employees, you need to collect the following taxes:
- Social Security and Medicare, also called FICA taxes
- Federal and state income taxes
- Federal and state unemployment taxes
Your company is also responsible for issuing W-2 forms for employees and 1099 forms for contractors by the end of January for the prior year. If the IRS or the state believes that you are the person responsible for collecting these taxes and then paying them to the appropriate taxing authority, the IRS and the state could hold you personally liable if they don't get paid. Even if you use a payroll service to handle these matters for you, any errors could fall to you.
What penalties you could face
The IRS may determine that you either willfully or recklessly avoided paying lawfully accrued payroll taxes. If you fail to meet your payroll tax obligations, you could face the following penalties:
- The Trust Fund Recovery Penalty
- A percentage of the taxes depending on lateness
- Fines for late payments
- A $50 penalty for each late or incorrect W-2
These are just some of the more commonly assessed penalties for failure to pay payroll taxes. These penalties can reach into the thousands or tens of thousands of dollars depending on the circumstances. It may be in your best interests to enlist some assistance in dealing with the IRS and the state to represent you in your dealings with taxing authorities.