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IRS Payroll Taxes: What Every New Business Owner Needs to Know

Starting a new business comes with many responsibilities, and one critical aspect that business owners often overlook is learning how to report and pay IRS payroll taxes. Payroll taxes, also known as employer withholding taxes or 941 taxes, are crucial for compliance and avoiding penalties. In this article, we will explore the basics of IRS payroll taxes, focusing on LLCs, corporations, sole proprietorships, and partnerships with employees.

Understanding IRS Form 941 for Payroll Taxes

IRS Form 941, also known as the Employer’s Quarterly Federal Tax Return, is the standard form used by most businesses. It covers withheld federal income tax, Social Security tax, and Medicare tax (collectively called “employment taxes”). Form 941 must be filed quarterly, with deadlines at the end of each subsequent month: April 30th, July 31st, October 31st, and January 31st. Properly filing and paying IRS payroll taxes is essential for avoiding penalties and ensuring compliance.

IRS Form 944: Annual Payroll Tax Return

For businesses with smaller payrolls, the IRS may require filing Form 944, the Employer’s Annual Federal Tax Return. This form consolidates reporting into one annual return. However, the IRS must notify the business if it is eligible to use Form 944. Otherwise, the business should continue filing Form 941 each quarter.

What Are Federal Tax Deposits (FTDs)?

If a business’s total quarterly employment tax liability is less than $2,500, it can pay the taxes when filing Form 941. If the liability exceeds $2,500, businesses must make periodic payments called Federal Tax Deposits (FTDs). These deposits must be made via the Electronic Federal Tax Payment System (EFTPS) to avoid penalties.

Electronic Federal Tax Payment System (EFTPS)

All FTDs must be made through the Electronic Federal Tax Payment System (EFTPS), which requires online registration using the Employer Identification Number (EIN). Once registered, the IRS will issue a PIN by mail, so early registration is crucial to ensure timely payments.

Types of Payroll Tax Depositors

Businesses are classified as either monthly or semi-weekly depositors based on their total employment tax accumulation. New businesses with employees are typically assigned monthly depositor status by default. These businesses must make FTDs by the 15th of each month for the previous month’s tax liability.

Monthly Depositor: Must make FTDs by the 15th of the month following payroll.
Semi-Weekly Depositor: Applies to businesses with over $50,000 in employment taxes during the IRS “lookback period.” Deposits must be made after each payroll, with different deadlines depending on the payroll day.

The $100,000 Next-Day Deposit Rule

Businesses that accumulate $100,000 or more in total employment taxes during any deposit period must make a next-day deposit. This rule applies to both monthly and semi-weekly depositors.

Why IRS Payroll Taxes Matter

Failure to file and pay IRS payroll taxes can result in severe penalties. The IRS has the authority to pierce the corporate veil of LLCs or corporations and hold owners or officers personally liable for unpaid payroll taxes. This makes it essential for business owners to understand and comply with payroll tax requirements.

Get Help with IRS Payroll Taxes

Understanding IRS payroll tax rules is crucial to your business’s success. If you have questions or need help with compliance, reach out to Fortress Tax Relief for a free consultation. Let our experts help you navigate the complexities of payroll tax compliance and avoid costly penalties.

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About the Author

Stephen K. Galgoczy, Esq.

Stephen K. Galgoczy, Esq. Steve is the founder and President of Fortress Financial Services. Steve has worked in the tax resolution industry, and has been representing taxpayers in collections with both state and federal governments, since 1999. Steve holds a Bachelor's Degree in Business Administration from the University of Washington (focus on Finance and Marketing) and attended Seattle University School of Law on an academic scholarship. He graduated cum laude and in the top 25% of his law school class. He holds a license in good standing with the Supreme Court of the State of Colorado and is admitted to practice in United States Tax Court. Steve Galgoczy has never been disciplined by the Colorado Bar Association. Before Fortress, Steve spent four years as the top Associate with two of the largest tax resolution firms in the United States. During his career as a tax resolution professional, Steve has personally handled over 1500 cases involving delinquent taxes and has had significant involvement in well over 2500 such cases. Steve has extensive experience handling some of the most difficult tax collection cases found in the world of tax resolution and is considered by many to be among the best tax resolution professionals in the country. Steve is also considered by many to be among the best in the nation when it comes to training other tax resolution professionals. He has trained a number of professionals who are currently employed by competing firms, including at least one professional who is an owner of a competing firm. Steve has also extensively trained every single Fortress attorney, which typically means more than 500 hours of one on one time with each attorney--and the vast majority of that time is spent working real life cases. While Steve’s primary focus is quality assurance for all Fortress clients, he is available to assist other Fortress attorneys when additional firepower is needed.