October 03, 2019
Businesses with employees have federal tax obligations besides income tax. The Internal Revenue Code (IRC) makes both employers and employees responsible for paying employment taxes, but the responsibility for transmitting those tax payments to the IRS belongs solely to the employer. If an employer fails to pay employment taxes or file an employment tax return, the IRC authorizes the government to create a return for the employer and assess the amount of tax due. The IRS has created a program that allows automated creation of missing returns, but the program is reportedly understaffed and lacking in other resources. A recent audit by the Treasury Inspector General for Tax Administration (TIGTA) found that these deficiencies in the program caused the IRS to miss billions of dollars in employment tax assessments.
What Are Employment Taxes?
The Federal Insurance Contributions Act (FICA) requires both employees and employers to pay the following employment taxes:
– 6.2 percent of the employee’s wages for “old-age, survivors, and disability insurance,” also known as Social Security; and
– 1.45 percent of the employee’s wages for “hospital insurance,” or Medicare.
The Social Security Administration (SSA) sets a cap on the amount of earnings subject to the 6.2 percent Social Security tax. As of the end of 2018, the cap is set at $132,900. There is no cap on earnings subject to the 1.45 percent Medicare tax.
The Federal Unemployment Tax Act (FUTA) requires employers, but not employees, to pay an excise tax of 6.0 percent of each employee’s wages up to $7,000.
What Do Employers Have to File for Employment Taxes?
Employers are responsible for withholding 7.65 percent of an employee’s wages for employment taxes, and paying a matching amount itself. They are also responsible for withholding employees’ estimated federal income tax from each paycheck. Each employee must fill out and submit a Form W-4, which contains the information necessary to calculate the amount of tax to withhold.
On at least a monthly basis, employers must remit all withheld income and employment taxes to the IRS, along with their matching employment payment. They must file Form 941 on a quarterly basis.
If the total amount of FUTA tax due during a calendar quarter is more than $500, the employer must make quarterly payments to the IRS. Otherwise, they can pay the amount owed when they file an annual Form 940.
The Automated 6020(b) Program
Section 6020 of the IRC allows the IRS to prepare, execute, and submit returns on behalf of taxpayers who fail to file on time. The IRS created the Automated 6020(b) Program (A6020b) in order “to promote filing compliance” for employment taxes. It enables the IRS to assess tax liabilities quickly and communicate them to taxpayers. Several events can lead to “closure” of an A6020b case, including full or partial payment and other responses from a taxpayer.
The Inspector General’s Findings
TIGTA found that the overall number of closures declined significantly between 2013 and 2017, from 261,582 to 21,746. The number of full-time employees assigned to A6020b also declined, causing a decline in the rate of closures per employee. This resulted in up to $14.7 billion in missed tax assessments. TIGTA blamed all of this on the lack of resources available to the program, and recommended that the IRS change that.
If you have payroll or tax-related questions in California, the Enterprise Consultants Group team of knowledgeable tax advisors can advise you of your rights and options. Please contact us online or at (800) 575-9284 today to discuss your case.