In a previous post, I talked about the reporting forms that are required for business payroll. In this post, I want to focus on the business killer - trust fund mis-management. As you pay employees, you withhold money from their paycheck and then submit it to the IRS and states for them. The deposits should be made electronically and you will need to set up the accounts before you need them. And you have to understand that the deposits may be made on a different schedule than filing the 941 and state payroll reports.
For Example: You agree to pay Sue $500 a week salary. That $500 will be reduced by her Social Security and Medicare contributions of $28.25 (current reduced rate) and her Federal and state withholding. That means you are writing her a check for say $378.97. That $121.03 that you withheld from her check is the most dangerous money, Trust Fund. It's called Trust Fund money since you are only holding it for Sue in trust until you are required to deposit it (based on the schedules the IRS and State gave you.) Of that $121.03, $28.25 is her SS and Medicare and $60.77 for Federal withholding and $32.01 for the state. You will also be expected to match the $38.25 (full rate) for your part of SS and Medicare. And you will be kicking in for Federal and state unemployment; say another $10. So: $378.97 paycheck + $121.03 trust fund money + $38.25 matching SS/Med + $10 for unemployment=$548.25 is what Sue's week really cost you. You write her a check for $378.97 and then what do you do with the remaining $169.28? That is where too many employers get into trouble. That money is allotted to be paid in a few days to months but it's still sitting in the checkbook where it can be spent on other things. Since Sue is your only employee, I would guess you'll be set up for quarterly deposit. At the end of the quarter, you fill out the Federal 941 and your state's forms for withholding and unemployment. Then you discover the IRS wants a check/deposit of say $1527.24 to cover this quarter payroll liabilities. And the state and state unemployment will want their shares too. Which by this time, you don't have.
If you are going to hire employees, you have to find a way to not be in this predicament. Some employers use a separate checking account for payroll and move into it the salary plus employer's obligations before they write the paychecks ($548.25 for this example). Other employers subtract the whole about out of the checkbook at the time. No matter what system you come up with, you have to do it religiously. If you don't, the letters will start.
The IRS catches shorts in payroll deposits and filings a lot quicker than short in income taxes. They have to because these problems can grow huge quickly. Penalties on Trust Fund money (what came out of employee's paychecks) can be up to 100%. Even a few days late will see a penalty. Remember this is the employee's money. You promised Sue $500 a week not $378.97. Withholding, Social Security and Medicare are credited to her accounts whether you pay them or not. The IRS needs to deter/scare employers into keeping payroll obligations current. That is the reason for the high penalties and tough enforcement.
If you find yourself in this situation, don't panic but don't ignore it. Put into place procedures so this won't happen again. File your reports and send in what you can. Call the IRS or your state department of revenue and work with them. Don't make promises you can't keep but get caught up and stay that way.