11 Reasons Why a Company May Receive a Payroll Tax Notice

Payroll tax notices from states or the IRS can be confusing and scary for a startup. Often founders don’t know rules around payroll taxes and can pay an employee incorrectly. Usually they fail to use payroll software to pull taxes out of the employee’s paycheck and remit the company’s portion for the taxes. However, there are a bunch more errors that can lead to a payroll tax notice. We figured it would be helpful for founders to have them listed. Kruze’s amazing State & Local Tax Team is here to fix these errors for our startup clients and prevent them in the future! 

  1. Switching payroll providers: If a company switches from a PEO (professional employer organization) like Justworks, Rippling, or Trinet to a non-PEO, it can lead to payroll tax issues because all the accounts are different once off the PEO.
  2. Rate Notice or Deposit Frequency Notice: A rate notice from the state or federal government can impact a company’s payroll tax obligations and lead to a payroll tax notice from the states or the IRS. Also, A lot of clients receive the CP136 notices with their deposit schedule for 941 payments which can be really confusing. The Deposit Notice is something simple and not a bill.
  3. Registration processing time: If a company has recently registered for payroll taxes, there may be processing time delays that can result in a payroll tax notice from the states.
  4. Incorrect employee information: If a company has incorrect employee information, such as a Social Security number or name, it can lead to issues with payroll tax filings.
  5. Not updating employee address: Failure to update an employee’s address in a timely manner can lead to issues with payroll tax filings and a payroll tax notice from the states or the IRS. A lot of payroll providers will not assist with back filings. It’s really important to get this updated appropriately.
  6. Unreported tips: This doesn’t happen with startups very often because there are very few service businesses that become venture capital backed startups. However for completeness, if a company has employees who receive tips, it is important to report them accurately on payroll tax filings. Failure to do so can result in a payroll tax notice from the states or the  IRS.
  7. Incorrect tax payments: If a company makes incorrect tax payments, such as underpaying or overpaying, it can result in a payroll tax notice from the states or the IRS.
  8. Misclassification of employees: For example, if a company misclassifies employees as independent contractors, it can result in payroll tax issues and potential fines. Another example would be an officer being the only employee in the State of Washington. An officer is not liable for unemployment insurance but this could register the company for the tax. The payroll provider may note they are not liable and not file or they’ll pay too much in and have a credit.
  9. Late or missing tax filings: If a company fails to file payroll tax returns on time or misses a filing altogether, it can result in a payroll tax notice from the states or the IRS.
  10. Additional state requirements: Some states have additional payroll tax requirements, such as Workers’ Comp in New York. Failure to comply with these additional requirements can lead to a notice.
  11. Proper settings in the payroll system must be turned on: We run into situations occasionally where a startup client will think they are withholding taxes and their payroll firm is submitting them, only to find out settings weren’t configured properly or turned on. We’re not going to name names, but there are some high profile payroll systems where this happens way more than it should. 

Startups should always strive to stay in compliance on payroll taxes. It makes life so much easier. The founders can focus on building the company instead of responding to notices and sitting on hold on the phone. Remember, Kruze is here to help - issues like these are a great reason to pick a unified accounting and tax partner like us. We’re happy to answer questions any time!