Withholding And Reporting Requirements

• Generally, businesses with employees must withhold 6.2 percent of an employee's pay on the first $106,800 of compensation each year, along with 1.45 percent for Medicare. In 2011, employees will have only 4.2 withheld because of a one-year tax break approved by Congress. Employers must also withhold the employee's estimated pro rata federal income tax, based on the number of exemptions they declare on their Form W-4. You must report all this information on an IRS Form 941, Employers' Quarterly Federal Income Tax Return.
  
  

Due Dates

• Form 941s are due one month after the close of the calendar quarter. Specifically, you must file a quarterly return by April 30, July 31, Oct. 31 and Jan. 31 of each year. You must also make quarterly deposits of payroll and employee income taxes, plus your contributions, by the same date. Some larger employers must make deposits on a monthly basis, rather than quarterly.
  
  

Penalties for Failure to Deposit

• Penalties for failing to deposit payroll taxes are steep: You will be assessed a 2 percent penalty if your deposit is just one to five days late. The penalty more than doubles, to 5 percent, for deposits made between six and 15 days behind schedule. The penalty for deposits made 16 days late or more is 10 percent. If you don't make your deposit within 10 days of receiving a delinquency notice from the IRS, the penalty increases to 15 percent. The IRS may assess additional penalties if you fail to file a quarterly tax return, as well. In extreme cases, you can go to jail.
  
  

Other Considerations

• You may not use employee tax withholdings as operating capital for your business. Also, even though corporations and limited liability corporations normally provide their owners and members with limited liability against the claims of creditors for debts incurred by the company, the IRS and the courts frequently hold business owners personally liable for any payroll taxes not forwarded to the IRS.