According to the Internal Revenue Service (IRS) and the National Federation of Independent Businesses (NFIB), almost one-third of companies see penalties due to payroll issues. Understanding a few examples, according to the NFIB, of how companies can better comply and avoid penalties is essential to smoother operations.

Underpayment of Estimated Tax by Corporations Penalty

As long as there’s a reasonable expectation of at least $500 in estimated taxes owed, corporations are required by the IRS to file. If, however, a corporation doesn’t satisfy its estimated tax payments or pays them after their quarterly submission deadline, the IRS will assess penalties. This can occur even if the IRS owes filers a refund.

The IRS recommends the easiest way to avoid the penalty is to pay the quarterly estimated taxes by the 15th day of April, June, September, and January of the following year (the following month after each quarter). If the 15th is on a weekend (Saturday or Sunday) or it’s a legal federal holiday, payment would be due on the next regular business day.

When it comes to assessing penalties for underpayment of estimated taxes, the IRS determines the penalty based on how much-estimated taxes are underpaid, the time frame of when the payment was due and underpaid, and the IRS’ current quarterly interest rates.

Based on 2023’s third-quarter data from the IRS, the federal agency charges a 7 percent penalty annually, compounded daily.

Failure to Deposit Penalty

Another payroll tax mistake businesses may make is the Failure to Deposit Penalty. The NFIB reported that nearly 50 percent of small businesses see fines on average of $850 annually because they’re late or missing payments. In order for businesses that must make employment tax deposits, it’s imperative to do so either on the IRS’ monthly or semi-weekly basis.

Required employment tax deposits cover Social Security, Medicare, and federal income taxes, along with Federal Unemployment Tax. Employers on the monthly route are required to deposit employment taxes on payments for the prior month by the 15th of the following month. For the semi-weekly route, deposits for employment taxes on payments made between Wednesdays and Fridays are to be made by the following Wednesday. For deposits done on a Saturday, Sunday, Monday, or Tuesday, employment tax deposits must be made by the following Friday.

Beginning with the due date of the employment tax deposit, the penalty is calculated by the number of calendar days the deposit is late.

Between one and five calendar days, there’s a 2 percent penalty on the unpaid deposit. Between six and 15 calendar days, the penalty increases to 5 percent of the unpaid deposit. If it’s late by more than 15 calendar days, the penalty is 10 percent of the unpaid deposit amount.

If more than 10 calendar days have passed after the first written contact from the IRS notifying the filer of failing to deposit their employment taxes or the day the business receives correspondence requiring immediate payment of employment taxes, the penalty increases to 15 percent of the unpaid deposit. It’s also subject to interest on the penalty.

While these are only two ways businesses can incur payroll-related tax penalties, it’s illustrative of how businesses need to keep on top of their federal (and state) obligations.

Sources

https://www.irs.gov/payments/failure-to-deposit-penalty

https://www.irs.gov/payments

https://www.irs.gov/businesses/small-businesses-self-employed/employment-tax-due-dates

https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2

https://www.irs.gov/payments/underpayment-of-estimated-tax-by-corporations-penalty

https://www.irs.gov/newsroom/interest-rates-remain-the-same-for-the-third-quarter-of-2023

https://www.irs.gov/payments/underpayment-of-estimated-tax-by-corporations-penalty

https://www.nfib.com/content/partner-program/money/are-you-guilty-of-committing-these-5-payroll-mistakes/  

Managerial accounting is a form of internal reporting that helps business owners and others involved in the organization’s decision-making. It looks at individual processes and products to see how they are functioning via practical data points. This is done in hopes of applying data analysis to improve the business’ operational efficiency.

It is important to keep in mind the intended audience and data structure with regard to managerial accounting versus financial accounting. While managerial accountants analyze information, it is not subject to GAAP requirements; however, financial accountants must present company information according to GAAP standards – and such information is often intended for external consumers like investors or lenders.

Measuring Inventory Levels

One way that businesses turn to managerial accounting is through scrutinizing their inventory turnover. Companies that analyze how often they have sold and replenished their inventory over a measured time period can make better decisions about their inventory cycle (production, buying new input materials, marketing, and pricing). Managerial accounting professionals help businesses identify the carrying costs of inventory. It’s expressed as follows:

Inventory Turnover = Cost of Goods Sold (COGS) / Average Value of Inventory

Higher ratios usually indicate greater company sales. Lower sales generally indicate there are problems with product or service demand.

Monitoring Outstanding Accounts Receivables

Analyzing accounts receivable can provide beneficial insights into a business’ bottom line. An accounts receivables (AR) aging report categorizes AR invoices based on how long they have been outstanding. The report can categorize how late payables are (30 days or less, 31-60 days, 61-90 days and so on). Based on the results, companies can look at historical data, along with projected sales, to figure out how much they need to allocate for uncollectable accounts. Companies also can proactively reduce credit limits, determine when it’s time to stop doing business with a customer/client, and send unpaid bills to collection.

Price Variance Considerations

When a business looks at price variance, the first step is to take the final price paid for each unit, then subtract the unit’s standard cost from the former figure. The resulting figure is multiplied by however many units were actually bought. It’s a way for managerial accountants to determine the difference, either a positive variance (increased costs above the standard price) or a negative variance (decreased costs relative to the standard price), between the cost planned and the cost at the time of purchase.  

The formula is expressed as follows:

Price Variance = (Actual Price – Standard Price) x Actual Quantity

If a business is planning to make a purchase for its next fiscal year, it may want only 5,000 widgets that cost $10 per widget. The business gets a bulk discount of $1 per widget, bringing it down to $9 per widget. However, when the time to purchase the 5,000 widgets comes along, it realizes it only needs to purchase 3,500 widgets. At the quantity of 3,500 widgets, the business won’t receive the bulk discount, reverting the cost back to $10 per widget, creating a variance of $1 per unit or widget.

Using the formula, it could be expressed as follows:

Price Variance = ($10 – $9) x 3,500 = $1 x 3,500 = $3,500. Since circumstances changed at the business between their initial planning and ultimate purchase time-frame, the price variance resulted in $3,500.

While managerial accounting has many different tools for analysis, the one common thread is that regardless of the tool used, managerial accountants help businesses find higher levels of operational efficiency.