When business owners come into our Richardson TX tax office with a payroll tax debt issue, it’s often more complex than a typical IRS 1040 tax debt problem. Payroll Tax Debt not only may involve risk at the corporate or LLC level, but both owners and possibly other “responsible persons” can be held personally liable for taxes owed. In rare cases, the issue can become criminal. Because of this, I often need to protect the client and resolve the debt at both the business and personal level.
How Does The Problem Occur?
It typically starts out simple enough. The business owner has a cash flow problem. This might a result of unprofitable operations for that business, or it can be due to a difficult economic environment, such as a recession. When the business owner has the cash flow problem, they often have to make difficult decisions on who to pay.
For example, maybe they have cash flow to cut payroll checks but not make the payroll tax payments. While the risk of losing the business if they don’t pay their employees is obvious, there is also a serious risk of failing to pay the payroll taxes that we’ll cover both today and in the next few blogs. First, there are the penalties and interest that are tacked on which we’ll cover today. In addition, there are risks of personal liability and in some rare cases, criminal prosecution that we’ll cover in future posts.
Why Payroll Taxes are Important to the IRS?
Payroll taxes are becoming a higher priority for the IRS and Department of Justice (DOJ). Approximately 70% of the IRS’s Revenue collection is through payroll withholding. There are two categories of Payroll Taxes.
- Trust or Fiduciary Funds are the portion withheld from the employee’s pay and includes Federal Income Tax withheld, as well as the employee’s portion of Social Security and Medicare.
- Employer Taxes are the employer’s match of the Social Security and Medicare taxes and Federal Unemployment.
What Happens If Payroll Tax Filings or Deposits are not Made Timely?
First the taxpayer will be hit with penalties for the failure to make timely Payroll Deposits that include the following:
- 2% Penalty if Late but within 5 Days of the due date,
- 6% for 5 – 15 days late,
- 10% if more than 15 days late, and
- 15% if the deposit is not made within 10 days after the first delinquency notice.
There is also a penalty for the failure to File Form 941 timely that is 5% per month for failing to file, up to 25%.
When these penalties pile on top of the taxes owed, it often makes it impossible to dig out of the problem for a company already having cash flow problems, and if penalties aren’t enough of a reason, we’ll next discuss the personal liability and potential criminal liability, that can turn a bad situation, into a living nightmare. Stay Tuned as we cover these topics!
Do You Need Help?
If you need professional help with IRS problems related to payroll tax issues or have any other IRS Collection or Audit issue, I’d be happy to talk with you. Please give me a call at (972) 821-1991 or email me at [email protected]