When most people hear IRS, they think of tax season and filing returns. But for employers, the Internal Revenue Service is much more than that—it’s the agency that makes sure businesses withhold, report, and pay the right federal taxes. Getting it wrong with the IRS can mean steep penalties, interest charges, and audits.
What the IRS does
The IRS is part of the U.S. Department of the Treasury. Its main job is to enforce tax laws and collect revenue for the federal government. For businesses, that means the IRS oversees:
- Income tax withholding from employees’ paychecks
- Social Security and Medicare taxes (FICA)
- Unemployment taxes (FUTA)
- Business income taxes for corporations, partnerships, and self-employed owners
- Information reporting (W-2s for employees, 1099s for contractors)
In other words, every time you run payroll, you’re interacting with the IRS—even if you don’t realize it.
Why the IRS matters to employers
Employers have special responsibilities under federal tax law. You’re not just running your own books—you’re also the one collecting and remitting taxes for your employees. Common obligations include:
- Withholding federal income tax based on employees’ W-4 forms
- Matching and paying the employer’s share of Social Security and Medicare taxes
- Paying federal unemployment taxes (FUTA)
- Filing quarterly and annual payroll tax returns (Forms 941, 940, W-2, W-3)
- Reporting contractor payments with Form 1099-NEC
Failure to do any of these can quickly draw IRS attention.
Common employer mistakes
- Misclassifying workers as independent contractors to avoid payroll taxes
- Missing deadlines for payroll deposits or quarterly filings
- Under-reporting wages (including tips or bonuses)
- Not keeping proper records of payroll, benefits, and tax forms
- Using payroll taxes to cover cash flow issues—a major red flag for the IRS
Penalties for getting it wrong
The IRS takes payroll tax compliance very seriously. Employers who don’t follow the rules may face:
- Late deposit penalties ranging from 2% to 15% of the unpaid amount
- Failure-to-file penalties for missing returns
- Interest charges on unpaid taxes
- Trust Fund Recovery Penalties (holding business owners personally liable for unpaid payroll taxes)
- Audits and investigations that can dig into past years
How to stay compliant
- Set up strong payroll systems – Use software or a payroll provider to automate withholdings and deposits.
- File on time, every time – Mark your calendar for IRS due dates.
- Keep clean records – Payroll, W-4s, contractor agreements, and tax filings should be stored and organized.
- Classify workers correctly – Use the IRS Common Law Rules (behavioral, financial, and relationship control tests).
- Audit regularly – A quick internal review can catch errors before the IRS does.
How Kubera HR Solutions can help
At Kubera HR Solutions, we help businesses audit their payroll and worker classifications so IRS compliance doesn’t become a headache. From making sure employees vs. contractors are properly documented to reviewing payroll tax practices, we provide peace of mind that your business is on the right side of the law.