Why Does the IRS Care So Much About Payroll Taxes?

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Payroll taxes are taxes paid on the wages and salaries of a business’s employees. The Internal Revenue Service (IRS) applies harsh penalties to employers who attempt to shirk payroll tax obligations, from fines or outright business closure to a criminal investigation and prison time for tax evasion.

Why does the IRS care so much about payroll taxes anyway?

The answer has a lot to do with where the money ends up, which is funding social insurance programs such as Social Security and Medicare. In 2015, federal payroll taxes amounted to more than a trillion dollars, which was six percent of the country’s gross domestic product (GDP), so this is a lot of money we’re talking about.

Types of Payroll Taxes

Federal Insurance Contributions Act (FICA) taxes comprise two types of federal payroll taxes on employee wages. Employers generally withhold half of FICA taxes from employees’ paychecks and pay the other half directly. These funds go toward Social Security (12.4 percent) and Medicare (2.9 percent).

Social Security has a wage cap of $128,400; earnings above that are not subject to the tax. However, Medicare has no such cap, and in fact, employers must withhold the Additional Medicare Tax (0.9 percent) on employee wages over $200,000.

Self-employed individuals pay the Self Employment Contributions Act tax, and similar percentages and caps apply.

The third primary federal payroll tax is the Federal Unemployment Tax Act (FUTA) tax, through which employers pay 0.6 percent on the first $7,000 of an employee’s wages.

Because the federal government relies so heavily on payroll tax funds, the IRS is committed to collecting what it’s owed. Still, even if you find yourself in a tricky tax position, you always have options—and the IRS isn’t always as unreasonable as its reputation might have you believe.

Do you need help getting your business back on solid tax ground? Call us or send us a message today.