Payroll mistakes that cause tax notices

Six causes of IRS and state payroll notices, how to avoid each one, and what to do if a notice arrives.

Which payroll mistakes cause IRS and state notices?

Notices come from a few causes: wrong setup data, a late deposit, a late return, an out-of-date state rate, a missing W-4, or a notice nobody answered. Each one can be caught before it becomes a notice.

Why do notices go to the employer?

The tax account belongs to the employer, so the IRS or the state writes to the employer whoever processed the payroll. The causes below are the ones StartEase has a help article for.

1. Wrong setup data

A wrong FEIN, a wrong state unemployment rate, or the wrong deposit schedule makes every payroll wrong in the same way. Typical mistakes are a digit swapped in the FEIN, last year's rate, or a monthly schedule when the IRS assigned a semiweekly one.

How to avoid it: the FEIN is required and must have 9 digits, and you can upload the IRS EIN letter next to it. The deposit schedule is a setting on the company, and the compliance calendar builds its dates from it. Read more: Wrong setup data.

2. A late tax deposit

The IRS charges a penalty on a payroll tax deposit made after its due date, and the penalty grows the longer the deposit is late. A person responsible for paying over withheld tax can also be personally liable.

How to avoid it: use the compliance calendar for every due date, choose who makes the federal deposits, and record each deposit with its date and confirmation number. Read more: A late tax deposit.

3. A late Form 941 or Form 940

Form 941 is due each quarter and Form 940 once a year. A return filed late carries a penalty of its own, even if the deposits were on time.

How to avoid it: the calendar lists the return due dates next to the deposits, Reports & forms gives the totals, and each filing has a history. Read more: A late Form 941 or Form 940.

4. An out-of-date state unemployment rate

Each state sets its own rate and changes it, often every year. When the rate on file is missing, from an earlier year, or a temporary rate has ended, the tax in every payroll is wrong until it is fixed.

How to avoid it: StartEase will not approve a payroll in those cases. It cannot tell a wrong rate that looks right from a correct one, so read the number once against your state's notice. Read more: A wrong or out-of-date state unemployment rate.

5. A wrong or missing W-4

The employer must withhold federal income tax using the employee's Form W-4. With no valid form, the employer withholds as if the employee were single with no adjustments. Too little or too much withheld shows up later as notices and unhappy employees.

How to avoid it: a payroll cannot be approved until each W-4 is approved, unless none was received. Read more: A wrong or missing W-4.

6. A notice nobody answers

A notice carries a reply date, and penalties and interest keep growing while you wait.

How to avoid it: send the notice to your payroll team the day it arrives and tell them the reply date. Read more: A notice arrives and nobody answers and the Agency notice checklist.

What if a notice has already arrived?

Do not ignore it and do not wait. Follow the Agency notice checklist, and send the notice to your payroll team at hi@starteaseai.com.