Business & Finance Taxes

Keep Your Small Business Running Strong - Avoid IRS Payroll Tax Problems

Small Business Statistics – A Strong Economic Engine That Could (and Does)

According to U.S. Department of Commerce statistics: 
  • There are 27 million small businesses in the U.S., which generate income for 70 million employees and family members.
  •  Small Businesses represent 99.7 percent of all employer firms in the U.S.
  • Pay nearly 45 percent of total U.S. private payroll. 
  • Create 4,000 new jobs on an average day; 90 percent of new jobs in America.
  • Six trillion: Dollars in revenue that small businesses generate each year, equivalent to the second largest economy in the world.

While these facts are quite impressive, keeping an individual business running well requires full dedication, constant planning and focus. Sadly, many smart small and mid-size business owners, particularly during tough economic times, make the mistake of using monies, such as IRS payroll tax payments, to pay operating expenses. This decision is wrought with consequences because trouble with payroll taxes can be the downfall of many otherwise successful businesses. 

The money business owners collect from employees to pay their share of federal withheld tax, FICA and Medicare (Social Security) does not belong to the business (owner) and must be accounted for and paid to the government within the narrow time frame allowed. What many unwitting business owners may not understand is that the misallocation of these funds can be construed as a criminal act by the IRS. By not paying payroll taxes on-time, the IRS, which assigns a much higher priority to collecting payroll taxes (than income taxes), can unleash its levy powers on the business's bank accounts and accounts receivable. Additionally, the amounts of penalties that accrue are obscene. Effectively, the IRS will put you out of business if you're not prepared.

If you are a business owner faced with payroll tax debt, understand that you are not alone, there is help. But dealing with the IRS directly regarding payroll tax issues without assistance, is ill advised.  It's like going to court without a lawyer. Hiring a Certified Tax Resolution Specialist or tax attorney who understands a business owner's need for working capital and cash flow to keep their business running is a step toward a permanent fix for a serious business payroll tax matter. 

The following three points of information are provided to better illuminate how the IRS views business payroll tax payments and to help a small business protect itself against their wrath:

1. Unpaid Employment and Payroll Taxes – A Road to Nowhere

Small business is the largest contributor to the annual tax gap, which is estimated at $345 billion a year (the amount of taxes owed but not paid because of noncompliance with tax laws). Money collected from employees in the form of payroll with holdings is considered by the IRS to be in trust by the business owner until the tax payment is due and monies are turned over to the IRS. The IRS has assigned a higher priority to collection of payroll taxes so as a result, it is now the focus of more diligent IRS tax collection.  The IRS can "pierce the corporate veil" and go after the individual shareholders or partners of the business. This is commonly referred to as the Trust Fund Recovery Penalty (IRC Sec. 6672). Therefore your payroll tax liabilities can double very quickly.  

2. The US Government is Creating Jobs – in IRS Tax Collection

To achieve enhanced levels of tax collection, the government has hired between four to five thousand new agents and officers to access and collect back taxes to the tune of $345 billion, according to the IRS's most recent estimate. The government spends much more than it takes in.  The IRS is trying to make up for some of this shortfall by going after taxes owed – at a rate faster and more aggressive than ever before.

3. The IRS is a Tough Opponent – Hire a Tax Specialist to Help You.

With small business payroll tax problems, when thinking about whether or not to deal with the IRS directly – remember that you are going up against the most aggressive collection agency on the planet. However, once you decide to permanently put your payroll tax issues behind you, I suggest you hire a tax attorney or Certified Tax Resolution Specialist so you have experts on your side who know the law.

The good news about payroll tax issues is that they are almost always preventable. Here are seven tips that can help a business stay in IRS payroll tax compliance and avoid future tax issues:
  1. Use a payroll service that offers tax filing services, to handle the payroll. (1) Your payroll tax deposits AND your monthly, quarterly and annual payroll tax filing requirements, including W-2s, will be on "auto-pilot".  (2) You won't be tempted to dip into your payroll tax fund when you're strapped for cash; (3) You as a business owner do not have the expertise to handle your own payroll taxes and chances are don't know all the filing requirements, deadlines etc. Hiring a payroll service will be the best investment a business owner can make.
  2. Assess if you can classify workers as independent contractors vs. employees. It's possible that you can use independent contractors instead of employees. But be careful! Check out the IRS's website for criteria for independent contractors versus employees and see if it applies. Hiring independent contractors instead of employees can save substantial monies re: payroll taxes.
  3. Beware of the IRS "Cascading Penalties." For example: if a business misses a payroll tax deposit of $10,000, it gets hit with a $1,000 (10%) failure to deposit penalty. Every week after that when you submit your $10,000 payroll tax deposits, the IRS is always applying it to the earliest quarter you missed. So for the next 7 times you submit your payroll tax deposit, the IRS is assessing that $1,000 penalty for the next 7 weeks even if you think you are paying on-time. All of the sudden you have a $7,000 penalty! Make sure that when you miss a payment that you designate those federal tax deposits to the right period.
  4. Beware of the corporate veil. The IRS is a very special creditor when it comes to payroll taxes for corporations and can pierce the corporate veil if the corporation does not pay over the employee's share of payroll taxes and can assess payroll tax against (the shareholders) your individual social security number. So you can find yourself suddenly personally liable for the corporation's payroll tax obligations. Don't think that because a business is a corporation that it's completely protected or shielded from the IRS—it's not.
  5. Get professional help if you owe more than $20k or $25k in payroll taxes. A well-qualified tax expert can help you keep your doors open, the lights on, and customers paying their bills to YOU instead of to the IRS. Since the IRS has the power to circumvent your accounts receivable and take the money from your customers who owe money to you, it is important that you don't let the IRS get this far.
  6. Consider a properly structured payment plan. You may qualify for an Offer in Compromise or penalty abatement because the penalties are going to be huge with payroll tax deposits. [Note: after you're late 16 days on a payroll tax deposit, the penalties assessed can add up to 33% of the deposit amount.] Consider the following points approaching the IRS re: a payment plan.
  • It is much more difficult to negotiate a payroll tax settlement such as a long-term installment agreement for unpaid payroll taxes or unpaid employment taxes as the IRS does not really care if your business survives.
  • Offer in Compromise settlements for payroll tax problems and business tax problems are also often rejected because the IRS may assume that the business is worth more than  the tax debt owed, and they use that as reason to reject the offer. To prevail in these Offers for payroll tax debt, the taxpayer needs representation by an expert who can analyze and effectively articulate the real value of the business.

Don't Wait for the IRS to Contact You. Take Action Now!

Don't put your business in jeopardy because of payroll tax problems. The IRS will not hesitate to shut a business down for non-compliance and non-payment, so don't go it alone. Without hiring expert representation to go to bat for you against the IRS, would be akin to representing yourself in court without a lawyer. Getting professional tax help now to resolve the IRS payroll tax problems, allows you to focus on running your business and continuing to do what you love.

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