Why Employment Tax Penalties Are Everywhere And What You Need To Know.

“​Employment tax penalties​” may sound like an intimidating phrase but it’s not. Let’s say you are running a business which is registered with the federal or state government, the wages you pay to your employees are subject to federal and state ​taxes​.Your failure to collect, account for, deposit or report these ​employment taxes will result in your liability to federal and state employment tax penalties. These penalties may range from huge fines, cancellation of businesslicense and even jail time.


Many practitioners who counsel business clients, both small and large, are familiar with the difficult challenges that quickly arise when taxes are withheld from employee wages but not turned over to the federal government. On occasion, these taxes are not paid over due to the misdeeds of an in-house bookkeeper or a third-party payroll service responsible for ensuring that a business meets its tax obligations. More often than not, however, employers, acting without bad intentions, use the withheld money to satisfy pressing trade obligations or to meet payroll, debts the nonpayment of which is likely to lead to the shutdown of the business and loss of employee jobs. Unfortunately, this strategy can prove extremely costly to both the business and its principals, generating exposure to substantial penalties for late payment or failure to pay at all.


Making the stakes even higher, the federal government has taken steps in recent years to increase the likelihood that employment tax cases will be handled criminally. All of this means that tax advisers working with business clients cannot focus solely on strategies to minimize and pay the business’s income tax obligations but also must be extremely vigilant regarding employment tax duties.

This article focuses on the potential criminal consequences that can arise when a business fails to collect or pay over withheld tax. Included is an analysis of the key tax crimes that can be charged in these cases. The article provides suggestions to help practitioners recognize when a business’s failure to pay employment tax may be treated criminally. It also provides guidance about how best to proceed to minimize a client’s potential jeopardy. The article includes a discussion of the difficult issues practitioners face as they seek to resolve civil cases through cooperation, while remaining cognizant of the potential for criminal referral and prosecution. Ultimately, however, the article notes that advisers best serve clients by detecting nonpayment early and promptly crafting payment plans to bring delinquent obligations current and ensure new periods do not become delinquent.

A business that cannot pay its bills presents many challenges for the tax professional, but the government’s apparent policy of more aggressive criminal prosecution makes these cases far more difficult. Advisers can no longer focus on simply trying to resolve potential liability under Sec. 6672 but now must also consider the specter of a criminal prosecution. Professionals serve clients well by stressing the importance of staying compliant with employment tax obligations.

Where a delinquency does develop, a tax adviser should help the client to take all steps necessary to resolve the situation before the government takes action. However, if the delinquency is substantial or involves multiple periods, or if other criminal acts may have been committed, the adviser should recommend that the client retain an attorney experienced in criminal tax matters as quickly as possible. Failure to do so may mean a professional who is trying to minimize a civil liability actually helps the government build a criminal case, creating jeopardy for the client and ­potential exposure for the adviser.   

Employer Obligation

No matter what scale of business you are running, if you have a business license, you are solely responsible for paying ​employment taxes​. If you don’t, you’ll be held liable for committing strict liability state and federal offenses.

Your Tax Clerks Cannot Save You!

Many employers make the common mistake of blindly relying on their payroll clerks. The IRS (​Internal Revenue Service) has specified the employers as the ​“sole responsible party” for reporting of ​employment taxes​. Even though you did nothing wrong, any third party within your business can go behind your back and spend the collected ​tax amount in anything other than depositing it to the state. Although the accumulated amount may be spent in paying off debts to avoid bankruptcy of the business and loss of jobs, the severity of the offense remains intact.

The Penalties

  • Delay of 1 to 5 days in the deposit of federal ​employment taxes​:IRS will impose a penalty of 2%.
  • Delay of 6 to 15 days: IRS will impose an​employment tax penalty​of 5 %.
  • IRS will collect 10% penalty from you if:
  • there is a delay of over 16 days in making the ​tax​deposit
  • you pay within 10 days after receiving the notice from IRS stating delay of deposit
  • you deposit at an unauthorized financial institution.
  • Willful evading of federal ​employment taxes​:felony charges and 5 years in jail.
  • Purposive failure to collect and pay federal ​taxes​to IRS: felony charges and years in jail.
  • Intentional submission of false IRS form: Fine and up to 1 year in jail.

It’s better to be safe than sorry!