The Simple Payroll Fix That Could Save You from IRS Penalties

The Simple Payroll Fix That Could Save You from IRS Penalties

Payroll might not be the most talked-about part of running your business, but nevertheless, it's crucial to your operations. It's also one of the easiest places to slip up and get penalized by the IRS. And in 2025, you now have the new provisions of the One Big Beautiful Bill Act (OBBBA) to contend with.

You could be a company founder, its CFO, or its HR lead, staying compliant with the IRS laws would always be a key to your business's survival. A simple way to do that is by tightening your payroll compliance immediately. This could ensure you safeguard your business from penalties, apart from unlocking major tax savings.

What are Payroll Taxes?

In case you didn't know, payroll taxes are mandatory contributions withheld from employee's wages by employers and paid to the government to fund Social Security, Medicare, and federal unemployment programs. As an employer, you must accurately calculate, withhold, and deposit payroll taxes on time. To do this, you must use IRS systems like the Electronic Federal Tax Payment System (EFTPS). Compliance Requirements pertaining to payroll also include filing periodic forms such as Form 941 (quarterly) and issuing W-2s to your employees annually. The IRS has strict penalties in place, so ensure you make payments on time, don't misreport payroll taxes, or fail to comply.

On July 5, 2025, the IRS expanded its penalty authority under Section 6676 to include employment tax refund claims, not just income tax. If you are concerned about compliance due to the OBBBA coming into effect, the IRS confirmed in August that while no changes are being made to Form W-2, 1099, or 941 for this tax year, businesses are still expected to accurately calculate and report qualified wages of their employees, especially tips and overtime.

All of this means that if you misreport wages or overclaim credits, you could face a 20% penalty on the excess amount, with no cap on the penalties that could be levied.

The OBBBA Payroll Provisions You Need to Know

The One Big Beautiful Bill Act, signed into law on July 4, 2025, introduced several key changes that directly impact payroll:

1. Deduction for Qualified Tips and Overtime

Employees can now exclude up to $25,000 of qualified tip income and $12,500 of overtime wages from their taxable income. Employers are required to keep track of tips and overtime received by employees so that they can make accurate withholding payroll tax payments to the IRS.

2. No Form Changes as of Now

Employers still use existing forms for payroll taxes, but must manually calculate qualified amounts for employee reporting.

3. Expanded Penalties

Erroneous employment tax refund claims now trigger a 20% penalty under Section 6676. This calls for careful calculations when claiming refunds on payroll taxes to avoid being penalized for errors.

4. Future Changes Coming

The IRS is developing new reporting forms and guidance for 2026, so businesses must stay proactive and alert to these changes.

Payroll Compliance

Payroll compliance is a complex issue and businesses tend to slip up from time to time. Let's take a look at the mistakes businesses often make and how to fix them:

1. Worker Classification

Misclassifying employees as independent contractors is one of the most common payroll errors. It can lead to back taxes, penalties, and even lawsuits. Use IRS Form SS-8 or consult a tax advisor to ensure proper classification.

2. Accurate Withholding

Even though withholding tables haven't changed for 2025, you're still responsible for calculating federal, state, and local taxes correctly. Mistakes here can lead to penalties and employee frustration.

3. Timely Deposits

Late payroll tax deposits are almost certain to get penalized. The IRS imposes up to a 15% penalty for deposits made more than 16 days late. Automate your deposit schedule to avoid this.

4. Recordkeeping

The IRS requires employers to keep payroll records for at least four years. That includes wage calculations, tip logs, overtime hours, and tax filings. Cloud-based payroll systems make this easier and more secure.

5. Affordable Care Act (ACA) Compliance

Under OBBBA, the ACA affordability threshold will increase to 9.96% of household income for plans starting in 2026. Make sure your health coverage meets this standard to avoid employer mandate penalties.

The Simple Fix: Upgrade Your Payroll Workflow

Here's how to stay compliant and efficient in 2025 when it comes to your payroll taxes:

• Use smart payroll software to manage payroll. Choose a system that tracks tips, overtime, and deductions separately. Look for integrations with accounting and HR platforms.
• Train your team adequately. Educate managers and staff on what counts as qualified wages. For example, voluntary tips are deductible while mandatory service charges are not.
• Conduct quarterly payroll audits to catch errors early. Review classifications, deductions, and reporting accuracy.
• Keep detailed logs of wage calculations, tip income, and overtime hours. These will be essential if audited or when filing amended returns.
• Keep yourself and your employees informed by subscribing to IRS updates and payroll newsletters. The IRS is expected to release new guidance for 2026, so don't get caught off guard.

Payroll compliance isn't just about avoiding penalties. It's also about unlocking efficiency. When your payroll system is clean, automated, and audit-ready, you save time, reduce risk, and improve employee trust.

Payroll might be routine, but in 2025, it's a strategic lever. With the IRS expanding its enforcement and OBBBA offering new tax benefits, now's the time to fix your payroll workflow, tighten compliance, and claim your benefits.

Because when it comes to IRS penalties, the best defense is a proactive offense.

FinloTax: Payroll Compliance Made Effortless

Don't let outdated workflows or missed details cost you penalties. FinloTax helps you stay ahead of IRS rules by tracking qualified wages, tips, and overtime with precision, while keeping your records audit-ready. Our platform ensures you claim every deduction and avoid every misstep. From smarter payroll to strategic savings, FinloTax is your partner in getting it right the first time. To consult our experts call 4088229406.