If an employer withholds federal taxes from an employee (income and/or FICA) they must be remitted to the IRS timely. If not, you can face hefty penalties and the IRS can come after individual people in a corporation.
There are penalties for late payments and then there is a penalty for failing to pay. Late payment penalties tend to be smaller and escalate over time. If you are deemed to have not remitted withheld taxes the IRS can assess a penalty of the entire tax amount, doubling the total amount owed. This can be assessed to the company or to a “responsible individual” meaning corporate officers can be help personally responsible.
Sometimes cash strapped business will tap into withheld taxes to pay bills, counting on future revenue to cover the tax “borrowed.” This is a large risk to take! Household employers have a little more leeway as federal taxes ultimately come due on their personal tax returns. That said, quarterly tax filings and 1040ES payments are recommended to ensure everything goes smoothly (and may be required for other reasons anyway).
No Corporate Protection
A corporate structure can hide officers from many different liabilities, payroll tax debts are not one of them. The IRS can even file a lien on the personal assets of individuals in a corporation for these debts.
We get this question a lot in our niche of household employment as well – “Should I set up an LLC to pay my nanny?” This is one of the reasons why it doesn’t make sense, an LLC wouldn’t offer any help in this case and payroll taxes are the main thing household employers need to worry about.
If you are a shareholder, owner, director, officer, or employee responsible for payroll you could be at risk. There can also be multiple people held responsible. Generally, to be held responsible, you need to fit the following:
- Be a responsible party for the administration of payroll and remittance of taxes, and
- Fail to conform to the law willfully.
These issues can apply to both corporate employers and household employers. If you are a corporate employer, looking for a payroll company to help can be a good idea. If you are hiring someone to work in your home like a nanny, housekeeper, caregiver, etc we are exactly that payroll service. Give us a call to find out more about being a household employer.