Payroll Tax Impounding: What is it? What are the benefits?

Payroll Tax Impounding may sound ominous, but it’s actually very useful for keeping your payroll tax responsibilities on-track.

What is Payroll Tax Impounding?
Payroll Tax Impounding is when your payroll tax liabilities are automatically deducted for each paycheck. Your payroll provider will then submit your tax payments to the appropriate government entity when they are due.

What are the benefits to Payroll Tax Impounding?

  • It is easier for the business owner. The business owner does not need to make tax deposits to the tax authorities
  • The business owner is insulated from penalties due to late or incorrect deposits. Since the payroll service will be responsible for making the deposits they are responsible if a mistake is made.
  • Budgeting is easier. Business owners that do not take advantage of tax impounding may not leave enough funds set aside to make the deposits when they are due because tax rates are always changing.
  • Payroll reporting is more accurate. The deposits shown on the quarterly payroll filings to the tax authority will always match the payroll tax liability. This avoids payroll issues later on.
  • If you receive questions from a tax authority your payroll service can intervene since they are your they can represent your for payroll related matters.

Let’s take a look at a couple of real world examples:

Doctor Al was doing his own payroll. He did it for years. He had around six employees and a retirement plan. Doctor Al paid the wrong amount and he didn’t realize it. The quarterly reports were complicated and he made math errors. It turned out he was making his deposits late but was overpaying each quarter. The IRS would send him a letter indicating that there were deposit issues. They didn’t issue any penalties for late payments because the doctor had a positive balance each quarter. He didn’t know what to do with the IRS letters. This continued until he decided to hire a payroll service. We were able to intervene on his behalf. He received a refund of over $2000. His deposits are now made on time. And he has no more letters from the IRS.

Ken is owner of a construction company. He had been doing his own payroll but hadn’t budgeted enough money to pay his payroll taxes. When he contacted us he had already received letters from the IRS threatening to seize property or rights to property. The IRS had developed a payment schedule for him but significant penalties had already been incurred. We impound the funds matching his tax liability with every payroll run and make the tax deposits and report filings on his behalf. He hasn’t had anymore problems with the IRS.