By: Upeka Bee, Founder & CEO, DianaHR.
Starting a company is hard, but running it is harder—especially if you have employees, as most small businesses do. HR, in particular, is full of minefields related to taxes and other regulatory compliance. Many founders try to handle these matters on their own. Many more turn to one of the 54,000 HR consultancies in the U.S.
I started my company in late 2023—providing AI-based HR tech solutions to small businesses. For the first six months, there were just two of us, alternately coding our product and providing hands-on HR administrative help to our customers. One of the areas we helped customers with was—you guessed it—payroll.
Then I got a nasty surprise in the mail—a letter from the IRS claiming that my company owed $20,000 in fees and fines related to our corporate taxes. Making a mistake like this was unfathomable. I had been diligent in working with an accountant to file our corporate taxes correctly and on time.
I contacted our accountant, who clarified that the issue was related to payroll taxes, not corporate taxes. This felt even worse—how could we have screwed this up? This is one of the things our clients pay us to handle for them!
Meantime, a second letter arrived from the IRS notifying us that we were not only on the hook for $20,000, but also that a 5 percent fine was being levied for every month we were late in paying—and that the fines had begun three months prior. This was just getting weirder by the moment – something was off.
I called the IRS and, after an hour on hold, learned that according to IRS records, my business owed payroll taxes for the last month of the prior year. But why would I owe payroll taxes when I had no employees at that time? The IRS agent suggested I check with our payroll vendor.
It took ten days to get through to our payroll vendor, who eventually responded, saying we needed to talk to our previous payroll provider. But we didn’t have a previous payroll provider—our company had been working with this provider since the inception of our payroll in early 2024.
I called the IRS again. This time, the agent said that the payroll vendor had sent our quarterly payroll filings twice but only paid once. However, they could not find the duplicate filings. When I went back to the payroll provider, they denied sending the filings twice.
To resolve the issue of an IRS fine, we dedicated considerable time to investigating the source of the error. Despite the payroll processor denying responsibility and the IRS maintaining its position, we ultimately determined that no money was owed. We then submitted extensive paperwork to the IRS, which resulted in the fine being waived. This process was time-consuming.
My advice for small business owners or startups, if this happens to you:
- Don’t ignore the notice. If the IRS is correct, ignoring the matter will just lead to higher fines in the end. This is not going to go away on its own.
- Don’t assume the IRS is correct. They make mistakes all the time.
- Employ appropriate software tools and services. It’s not worth a business owner or founder’s time to troubleshoot these issues; catch them proactively.
Throughout this ordeal, a persistent thought echoed in my mind: I wish I had someone to handle this for me. Even after identifying the core issue, navigating the IRS forms and resolution process was incredibly time-consuming and draining. When such situations arise, and they frequently do, it’s crucial to seek assistance from qualified services equipped to manage them effectively.
Incidentally, this experience led us to start dogfooding our own service—something we should have done much sooner. Now I have an internal HR expert handling all our back-office operations for us. It’s been a massive relief and has already saved me many hours.
I have seen many small business owners—across all different payroll and benefits vendors—get that “deer in the headlights” look when confronted with complex government notices. These founders are incredibly talented and hardworking, and their passion is to create businesses and take care of their employees—and I want to make sure they can do just that.
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Tags: Payroll, Payroll Taxes
