During my CPA career I have seen business owners shirking their responsibility to withhold and pay federal income taxes, too many times. The taxes can be both federal and state. On the federal side, FICA (social security), Medicare, income taxes, and unemployment insurance (FUTA) can add up to large amounts that these employers cannot seem to part with when their business is in a bind. Penalties and interest usually compound the problem.
Not only are the owners responsible, but any “responsible party.” See The Consequences of willful failure to pay payroll taxes by Vani Murthy for a more comprehensive discussion on the responsible party. There has been limitations on who these people are, but just because you delegate the duty does not mean you are off the hook. If you are the owner or officer, the responsibility may put your personal assets at risk. Worse yet, in the most egregious cases, the IRS has imposed criminal penalties including jail time.
So, what can a business owner do to avoid falling into this situation? And, if in it, what can they do?
- Manage your cash flow: This is always the first step. Too many business owners look at payroll taxes as a necessary evil that can be placed on the back burner. Instead, place this item at the top of your cash disbursements along with the payroll. Pay them at the same time as your payroll, not the 15th of of the following month, or any time before that just because it is mandated by law.
- Defer your personal payroll to the next month: As a small business owner, if you can personally afford paying yourself for a few weeks, defer your personal paycheck to the next month. That can be only one day when you pay payroll on the last day of the month. This could delay your payroll tax liability due date.
- Understand the danger signs: If you are using your business credit line to “make payroll,” then your business model is probably broken. It could be for a number of reasons: Uncollectible receivables, too low of a gross profit ratio, unproductive sales employees are just to name a few. I have seen all of these sink businesses.
- Talk to the IRS: If you find your company without funds, rectify the problem as stated above but also open a dialog with the IRS. Keep the communication open and implement a payment plan for back taxes. This may keep them from levying your bank account thus sabotaging any efforts to save your business.
- Take your head out of the sand: There is a type of business owner that I have come across that uses the ostrich method. They just put business problems out of their mind and don’t plan on rectifying them. When I would make recommendations they would delay until forgotten. Please try to avoid this.
Meeting a challenge before it happens, and after it happens will usually be the best route to take with payroll taxes. Since all situations are unique, please consult a tax adviser before making any decisions.
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