Why You Must Make Your Employees’ Tax Deposits On Time
Business Owners Must Be Sure To Make Their Payroll Tax Deposits Or They Could Land With Penalties Or Even Jail Time.
Let’s face it. If you own a business, you always have to be thinking about paying taxes.
To make ensure you are in compliance, you need a tax expert in your corner that can help you meet all deadlines and follow every payroll tax law.
Many business owners, including some of Attorney Sammy Kim’s clients, have taken their unpaid payroll tax accumulation too lightly.
When cash flow becomes tight, it might be tempting to spend the funds withheld from employees’ paychecks to keep the business afloat or for other reasons.
Payroll Tax Warning For Businesses
In a situation like that, some businesses may have skipped the required federal tax deposits for their employees’ payroll taxes.
Eventually, the business owner will begin to receive warning letters from the IRS, threatening collection action and even criminal tax referral.
However, business owners sometimes allow the letters and warnings to pile up, afraid to address the warnings and not knowing what to do next.
They just don’t think they’ll be the one hit with massive penalties or even jail time — until they are in too deep.
Payroll tax liability problems can arise in all sorts of industries, including the following:
- Car dealerships
- Construction companies
- Doctors’ offices
- Government contractors
- Gun dealers
- Vitamin and other supply companies
An experienced tax lawyer can help a business owner get out from under a payroll tax liability mess.
But it’s certainly better to avoid a payroll tax problem in the first place.
The Federal Trust Fund Recovery Penalty
An employee’s payroll tax amount is split into three parts:
- Income taxes withheld from the employee’s paycheck.
- The portion of the employee’s FICA tax that is withheld from their paycheck (7.65% of the employee’s income).
- The portion of the employee’s FICA tax that the employer is required to pay (7.65% of the employee’s income).
If a business owner fails to pay as required, the TFRP amount is the unpaid balance of the trust fund taxes as follows:
TFRP = Unpaid Income Taxes Withheld + Employee’s Portion of Withheld FICA Taxes
In relation to unpaid payroll taxes, business owners should be aware that the federal government can convert any payroll tax debt for the business into the personal tax debt of the “responsible person” charged with paying the tax.
That means that a business owner, company president, CFO, accounting person or other person responsible for handling the company’s payment of payroll taxes can become personally liable for any unpaid taxes as a civil penalty.
That is true for a responsible person, even if they have zero ownership interest in the company — and that means the IRS can take action against personal assets as well.
How Businesses Can Avoid — Or Resolve — A Payroll Tax Liability Problem
The number one way for a business owner to avoid a payroll tax liability problem is to heed this advice:
Never be late in paying your federal tax deposits.
Simply put, whenever you pay your workers, make your federal tax deposits to the IRS.
However, for some businesses that are short on cash, that might seem easier said than done.
If you are a business owner who missed a deposit because you were short on cash, be sure not to wait more than two or three periods to catch up — including penalties and interest.
When a business has unpaid payroll taxes over a few years time, with back taxes, penalties and interest accruing, a tax attorney with experience working with the IRS can help solve the problem.
If you are behind in paying trust fund taxes on behalf of your employees, the second piece of advice is:
Focus on paying your most current taxes due — not the unpaid back taxes from prior periods.
That might sound counterintuitive.
Many businesses assume that they should catch up on back taxes starting with the first periods they missed paying.
But the truth is that every possible payment plan or arrangement to settle tax debt, including an Offer in Compromise and an Installment Agreement, requires a taxpayer to be firmly compliant for the current tax period.
Current compliance sends a strong signal to the government that your business is not creating any new tax liability going forward and opens the door to more options for resolving your tax debt.
In addition, paying taxes for the current period actually saves you money in the end.
A business owner who attempts to catch up on back payroll tax liability from the beginning might be paying for earlier tax periods for which the penalties have already maxed out.
However, the current tax period will have new penalties accruing.
Maximizing current payments allows a business owner to reduce or eliminate new penalties.
In fact, a tax lawyer can work with a business to create a strong compliance history before working on the best proposal to resolve the past tax problem.
A skilled tax lawyer can also help manage the IRS collection action for your back payroll taxes and determine the best way to solve your tax problem.
A Note of Caution: Business Owners Can Lose Their Homes And Even Go To Jail
In the past, it was not common for business owners with payroll tax debt to be hit with foreclosures or be sentenced to time in prison.
But now, if you have back tax liability and equity in your home, you are at risk for foreclosure more so than in the past.
And if you don’t take action to resolve the problem, you can also be sentenced to jail time in some cases.
Before you land in either of these difficult predicaments, talk to a tax expert now.
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