If you operate a business that collects payroll taxes from employees, always remember this: No matter what your corporate financial situation is, don’t borrow from the withholding tax fund. If that money isn’t there when it’s due, the IRS will crack down hard.
All small businesses face downturns when cash flow dries up. Borrowing from the payroll tax fund may seem a tempting and easy fix to cash flow problems. You may think about just sending it in later. But when it comes to bad ideas, this is one of the worst.
The IRS will take action against the responsible parties if the payroll tax deposits aren’t made on time. That money belongs to your employees and is meant to be held in a trust fund until deposited to pay income tax, Social Security and Medicare taxes.
Payroll taxes are one area where you cannot escape personal liability. Your business’ corporate tax structure won’t protect you from tax liabilities.
The IRS wants every cent of the trust money. If there isn’t enough money to pay the bill, the IRS can attach your business bank accounts or assets. If there’s still a shortfall, you may find your business shut down and your assets seized and auctioned off.
If that isn’t bad enough, the debt is not dischargeable, even if your firm files for bankruptcy.
While the government won’t usually send violators to jail, if the IRS sees a pattern of repeated violations, it can launch a criminal investigation, which could lead to prison.
The repercussions can spread beyond the company. There are legal precedents that allow the IRS to collect from, for example, banks and financial institutions that lend you money to pay those taxes. The agency can go after partners and other corporate executives, even if they weren’t active in running the business.
What to Do
The easiest way out of a payroll mess is to avoid getting into one in the first place. If you’re involved in a small or medium-sized business, it is a good idea to hire an outside service to handle payroll duties. A good payroll service provider relieves you of an enormous burden by cutting the checks, making the deductions, taking care of the tax payments and handling recordkeeping. But don’t be lulled into feeling like your payroll is on autopilot. Payroll needs regular monitoring. Your company, not the payroll provider, will bear the ultimate responsibility if a shortfall occurs. Talk with Filler & Associates about the best way to handle your payroll responsibilities.