When Your Business Owes Employment Taxes – What To Do Immediately
You’ve been running a business for many years. It is your family’s sole source of income. The business has always made enough money to pay its creditors, its taxes, and to support you and the workers. But for whatever reason, it has fallen behind on its federal and state employment taxes. You have continued to pay the rent, the other expenses, and to give the employees their paychecks – you just haven’t made the tax deposits because there “isn’t enough money.” This is a serious problem that could result in your business being shut down, the IRS and state agencies holding you personally liable for what the business didn’t pay, and worse, potential criminal liability resulting in prison time. But there are things you can do to help yourself right now, before the IRS and state show up at your door.
1. Get Back On The Train
Neither the IRS or the state will discuss any sort of arrangement with your business until you have stopped “pyramiding liabilities,” i.e. until you have stopped issuing net paychecks to employees without making the required tax deposits. In fact, the IRS typically requires six months of clean compliance history before they’ll consider any sort of proposal from you. The first step in fixing any problem is to stop making it bigger. It is critical that you realize you are using the IRS and the state as an involuntary lender to subsidize your operations. It is illegal and must cease. For many businesses, the only way to fix the problem and keep it fixed is to turn over payroll processing, payment, and compliance to a third party payroll processor. Our firm recommends Paychex for this. Paychex can process your company’s payroll, issue the paychecks, file the returns, and even make the deposits for you. If you want to talk about pricing and getting your business signed up, call Pam Rossi at Paychex (phone (703) 698-6910 x 27044).
2. Figure Out How Much Can Be Collected From You
The IRS can collect the trust fund portion (the withheld federal income tax and employees’ half of the Social Security and Medicare taxes) from anyone responsible for collecting and paying over such taxes to the government. For more information, see our article on the Trust Fund Recovery Penalty . It is important to quantify your personal exposure to the business’ tax debts and to start making voluntary payments targeted at the unpaid trust fund. Such payments can only be made by paper check – EFTPS does not permit taxpayers to designate such payments between trust fund and non-trust fund. The checks must clearly state the EIN of the business, the form and quarter, and “TRUST FUND ONLY,” e.g. “EIN xx-xxxxxxx, 2015-12 Form 941, TRUST FUND ONLY.” Chances are, the IRS will ignore the designation instructions and post the check incorrectly. But if your check includes these designation instructions, the IRS will have to correct the posting later.
Making voluntary, designated payments to the trust fund portion of the business’ federal employment tax liabilities not only reduces the business’ balance and your own personal exposure, but it demonstrates to the IRS an effort to fix the problem before they have to get involved. That can often go a long way in securing the cooperation and good will of the revenue officer eventually assigned to the case.
Most states have statutes that permit unpaid state withholding taxes to be “converted” against corporate owners or officers. While the IRS can chase “responsible persons” only for the trust fund portion of the unpaid employment taxes, most states can attempt to collect the entire balance owed by your business. In addition, most states are quicker to respond to a problem than the IRS. If you must make voluntary payments or immediately negotiate a payment plan, the state is often a good place to start.
3. Make Some Hard Choices
Often, it is failing businesses that wind up with employment tax problems. There is a downturn in the economy or a particular market and a previously-successful company falls on hard times. In an effort to preserve a failing enterprise, the owners looks for cash anywhere they can find it, and often the tax money becomes the proverbial cookie jar. But every quarter that goes by with the taxes being unpaid brings the business closer to bankruptcy and the owners closer to personal financial ruin. It is often necessary to take a hard look at a business with tax problems and find out if it makes enough money to pay all of its expenses, including the taxes. If it doesn’t, then it should be shut down. The longer it is kept open with the taxes going unpaid, the longer the legacy of a dying company will hang like an albatross around the necks of the owners. Personal liability for federal and state employment taxes cannot be discharged in bankruptcy and merely closing the company will not stop the tax authorities from chasing you personally.