One of the greatest dangers a business can face is a run-in with the IRS over payroll taxes. IRS auditors won’t hesitate to swoop in and take care of the problem whenever they suspect payroll taxes aren’t paid.

The reason is simple.

The IRS considers it their money, and they would rather shutter the doors of a business than not get their revenue. And they have wide latitude on how they can collect on a tax debt.

For example, the IRS can take your bank account, real estate, financial investments, cars, boats, and even your house. They can even hit you with federal criminal charges.

If all this sounds a little scary, well, it should. Getting payroll taxes right is essential, so let’s look at some of the most common issues and how to avoid them.

Classifying workers

 The IRS views people that work for you as one of two types: employee or contractor. You are responsible for the payroll taxes of employees, but not contractors.

Unfortunately, this makes it tempting for some businesses to overclassify workers as contractors.

The best way to avoid this is to follow guidance issued by the IRS. Their general rule is that a contractor can be told what must be done by the employer but not how to do it.

The IRS goes into more detail on its website. Take some time to familiarize yourself with their rules and avoid big headaches in this area.

Miscalculating overtime wages

 An employee must be paid 1.5 times their regular pay for overtime wages by federal law. Some states may have additional regulations that must be followed, as well. Fortunately, good payroll software can help you avoid costly mistakes.

But if you don’t have access to software, use this handy guide as a starting point. But be sure to keep up to date because changes can and do occur.

Not filing required reporting

 As a business owner, you must file quarterly reports on your employees’ wages. There are also additional reports (and taxes) for unemployment taxes. Work with your CPA to ensure these are filed on time.


Failure to do so can put you on the IRS radar and generate expensive interest payments and penalties.

Not having a plan for tough times

Just about every business goes through a rough patch when there is too much month at the end of the money. Often, this is where payroll tax troubles start. When it happens, an owner might decide to put off paying taxes to cover payroll.

And though it may seem noble to pay employees over the IRS, it isn’t smart (or legal).

It is essentially taking out a loan. But the IRS is not a bank, and they aren’t interested in loaning money. So, when it is time to collect, the penalties and interest can be stiff.

Working closely with your CPA to ensure a cash buffer or an actual line of credit exists to handle these downtimes is the wisest way to avoid banking with the IRS.

While this may be one of the scariest blog entries on our website, it’s definitely worth knowing. And honestly, there’s nothing to fear if you work with your CPA to understand the rules and have a good plan when your business hits those inevitable bumps in the road.