Once you’ve paid over your payroll taxes and filed any necessary returns and reports, your last significant obligation is to maintain records that substantiate the payroll taxes you paid.
For federal tax purposes, you must retain records for at least four years after the due date of the return or the date the taxes were paid, whichever is later. A similar record-keeping requirement exists in each state, with varying time periods.
Types of records. There is no particular form prescribed for properly retaining records. However, the records must be kept in a manner that will enable the IRS and your state tax authorities to ascertain whether any tax liability has been incurred and, if so, the extent of that liability.
The types of information you should retain include:
- the name, address, and Social Security number of each employee
- the total amount and date of each payment of compensation
- the period of service covered by each payment of compensation
- the portion of each payment of compensation that constituted taxable wages
- copies of each employee’s withholding exemption certificate (Form W-4)
- dates and amounts of tax deposits you made
- copies of returns you filed
- copies of any undeliverable Form W-2
IRS inspection. You’re obligated to keep all your required records at convenient and safe locations that are accessible to IRS representatives. And, your records must be available at all times for IRS inspections.
Payroll Tax Penalties Can Be Severe
There really aren’t too many opportunities for reducing your exposure to payroll taxes. If you hire employees and pay them any kind of compensation, it’s a given that you’re going to have some payroll tax liabilities. Perhaps your biggest opportunity for realizing any kind of real savings is to make sure you tend to each of your obligations and avoid getting hit with stiff penalties.
Many of the potential payroll tax penalties are the same ones you’ll find when you’re dealing with other types of taxes. For example, there are both criminal and civil penalties for failing to timely file payroll tax returns or to timely deposit taxes you owe. There are, however, a couple of penalties of which you should be particularly mindful as you deal with your payroll tax obligations:
100 percent penalty. The biggest risk you face in administering your payroll tax obligations is thatyou can be held personally liable for all income and FICA taxes that you willfully either fail to withhold from your employees’ wages or fail to pay to the IRS and your state tax agencies.
Even if you avoid the 100-percent penalty because your conduct wasn’t “willful,” you could face smaller penalties if your failure to withhold was due to your misclassification of an employee as an independent contractor. In the context of tax penalties, willfulness requires that the individual’s conduct be intentional, knowing, and voluntary.
In some cases, a reckless disregard of obvious facts will suffice to show willfulness.
Form W-2. If you fail to prepare a Form W-2 for your employees, or if you willfully furnish incorrect ones, you will be subject to a penalty, per each statement that should have been sent or that was incorrectly prepared.
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