The guaranteed way a company owner can get himself (or herself) in deep, almost unrecoverable, trouble with the IRS is to not pay employment taxes. Employment taxes are the withholdings of income tax, Social Security, and Medicare from an employee’s paycheck. The IRS is forever on the lookout for companies that fail to pay these taxes on time.
I have seen so many smaller companies “borrow” the funds from these withholdings, expecting business (or collections) to pick up, so they can pay the federal government later. This is worse than foolhardy. Moreover, if you are an officer of a small company- even if you are not intimately involved, you want to make sure these taxes are paid- on time!
You see, if there is a shortfall, the IRS has tremendous leverage. It can make a PERSONAL assessment against ALL responsible parties who have ownership OR signature authority for the entity; it includes employees (if they sign checks), directors, and/or shareholders. And, it’s a simple calculation: The IRS imposes a Trust Fund Recovery Assessment (TFRA) against each and every person involved. How much is the TFRA- 100% of the withheld income taxes and the employee share of payroll taxes (Social Security and Medicare) that are unpaid.
In these situations, it is not atypical for every person involved to blame another. The IRS has a simple solution to this massive fingerpointing. Prove (not allege) you were uninvolved AND uninformed. If you can’t, you are responsible.
Wait, there’s more. The IRS can seek criminal penalties. That usually means jail. You must recognize that about 1/3 of the total tax collections are derived from employment taxes. This is big money.
And, don’t think that filing for bankruptcy protects you against this bill. You can not be discharged from TFRA, by this means. Yes, the company can file bankruptcy and cease operating. But, the bill is simply transferred to the responsible persons (even if they don’t think they are), as outlined above.
Just to make sure you understand, if you pay your employees in cash- in part or in whole, this will not absolve you from the TFRA. The IRS considers this practice criminal by definition. That means 100% penalty AND criminal charges will ensue- and they will determine the liability based upon reasonable (not necessarily to you) wages paid.
Did I make it clear enough? Set up a savings or separate checking account, deposit those funds withheld from the paychecks, and then pay your employment taxes, as required. (Some people must pay within 3 days of payroll, while those with smaller payrolls must pay monthly or quarterly. And, don’t owe the Federal Government more than $ 2500 without making a timely deposit, either.)
Sage advice as always. The last people I’d want to have to deal with are the IRS. No such thing as innocent until proven guilty there! Have a great weekend, Roy!
You, too, Ms. S (squared)…
Forewarned is, indeed, forearmed. Or, they will forearm you. (And, like in football, it might hurt!)
Roy
Roy, great clarion call – render unto Caesar that which is Caesar’s – otherwise Caesar will own your kesiter.
I figured I’ve harangued my clients enough about this, Tor- and it still leaves the IRS with a large universe of targets. So… let’s use the internet to spread the news. (Yes, I do love the song: New York, New York- of course!)
Roy
A subject that has to be discussed but one that isn’t so popular! Thanks Roy for making it very clear that you don’t want to mess around when it comes to your payroll taxes. I pay my self-employed tax every quarter. I don’t have employees (yet), because I use outsourcing, temp companies and independent contractors for specific projects. I know, I have to issue 1099’s and I do. Appreciate your knowledge and sharing this info with us!
Fantastic to hear, Lynn!
One of the reasons we moved into accounting and taxation was because so many of our tech clients- who had great products (we worked with them to make them fantastic) would fold due to tax issues.
Thanks for your story- to amplify the impact.
Roy
And keep a separate account for income tax too. It seems hard and unfair but….the price for the privilege of being in business.
The lack of understanding or even thought by some business owners is criminal. And while we all hate to pay taxes, we love to be in business so taxes are the price for being in business.
Thanks Roy – BTW this message applies in all the countries I have lived and worked in too
I am not sure (at least in the four countries where we do taxes) that the Tax Department has the right to target the officers, directors, or check signers PERSONALLY. But, it’s good to know (since misery loves company) that other countries do so, Roberta.
And, I agree about taxes and business owners. And, I will up the ante about a separate account- use a different bank besides. That way, if you make an (honest) error, and the Tax Department decides to attach the funds in your bank account, you won’t be surprised with bounced check fees if they hit your primary account.
Rooy
This has been one of the topics that is not mostly discussed. I guess every company must be responsible enough to take every responsibility for their employees. I guess they don’t want to face IRS either.
Thanks for dropping in Belinda! And, you are right… when someone plays with these taxes, they are really stealing funds from their employees! After all, it’s THEIR tax withholdings, money that was taken from their paychecks that are the bulk of such funds.
Roy
Yes, Roy. You were clear. In Hawaii, for restaurants, they have even more leverage because you cannot get a liquor license unless you show all your taxes are current–all forms of federal, state and county taxes.
Your point was perfectly clear. Aloha. janet
Thanks for your comments- and amplification of the effects of either being negligent or foolish, Janet!
Don’t let your business be destroyed. There are other ways to use cash- that are safer and less costly.
Roy
All great points, Roy. I am both an employee in health care and self-employed with my online business and local marketing. It’s so easy to keep putting off the amounts that will be needed to pay self-employment taxes then have to scramble.
I don’t have employees, as what I do outsource is to independent contractors but I still have to pay taxes. One of the steps I took this year is to increase my employee deduction so any refund can help to offset self-employment taxes. Thanks for these essential reminders.
Thanks, Yvonne for dropping in and leaving a comment.
Folks don’t realize when they are working at home that they are their own employers! And, that even if they end up NOT owing income taxes, they still owe employment taxes Their shock comes around April 15- and it can be devastating. Thanks for bringing that point to the fore.
Roy
Great post Roy! You gave great advice and listed some great insights on this post. Thanks! Keep it up! 😀
Thanks, PJ for your visit AND your comments.
I am so glad you enjoyed the post!
Roy
Tax evasion is a serious crime. However most big names and companies gets away with it by building corporations and charity networks which is a pretty smart move to monopolize their money.
Thanks for dropping in Trudie and for your comments. It’s great to meet you.
This is one of those crimes that is more often perpetrated by smaller companies. The bigger ones that have tried this or played fast and loose with the definitions get caught very quickly (including Microsoft).
Roy