If you’re stressed about payroll tax debt, you are not alone. Each year, thousands of small businesses and entrepreneurs miss payroll tax payment deadlines. Not surprisingly, the IRS assesses penalties right away and accelerates them as the debt grows older. As with most forms of debt, payroll tax debt only gets worse if ignored.
In time, a staggering bill for back payroll taxes and penalties can even cost you your business.
The government considers the collection of payroll taxes a priority. These taxes fund Social Security, Medicare, Medicaid and unemployment insurance. Since funding shortfalls for these programs have such devastating consequences, the IRS practices swift and severe enforcement.
Penalties can balloon to 100% of the tax owed. Civil actions often lead to tens of thousands of dollars in legal bills. If the IRS considers the matter tax evasion, it may refer the case to the Department of Justice for criminal prosecution.
Do not ignore payroll tax debt. Despite the tough IRS enforcement measures, the agency is willing to work with businesses that are struggling to manage their taxes. Payment plans often help get payroll taxes back on track without forcing the business into the red.
Making these arrangements is always in the best interest of the company. Once the IRS moves forward with an enforcement action, it can levy bank accounts, seize property and even force the business into liquidation. By working with the IRS prior to an enforcement action commencing, business owners can save time, money and their livelihoods.
How payroll tax debt adds up
The government funds Social Security, Medicare and Medicaid through a pay-as-you-go system that collects money directly from the paychecks of workers. W-2 employees and their employers split the 12.4% Social Security tax, so the company must pay 6.2% of each worker’s salary or wages to the government, along with 1.4% for Medicare. Many companies must also pay unemployment insurance premiums on the first $7,000 of each employee’s earnings.
These payments must be transferred to the government on a monthly basis, along with federal income tax withholding. In a worst-case scenario, an employer would fail to hand over the full 12.4% in Social Security taxes, Medicare taxes, unemployment insurance premiums and federal tax withholdings. This can leave a company in a mountain of debt that the IRS can increase by 100% through penalties.
Who bears responsibility for unpaid payroll taxes?
Because responsibility for unpaid payroll taxes is defined so broadly, the IRS enjoys great latitude in who they hold accountable. In general terms, the IRS considers who at the business has the authority over the funds and who signs the checks. In addition, they consider which officer of the company exercised control over payroll. Many other factors may come into play, but the IRS tends to focus on the person who has the most authority when it comes to paying taxes. A notable exception is non-owner employees performing their jobs without independent authority over tax payments.
Often, business owners hire a third party to handle their payroll taxes. For many businesses, this is a wise way to reduce administrative burdens and liability. However, it is important to supervise the activities of third-party vendors. If, for some reason, the vendor fails to pay the taxes, the government places the burden of back taxes and penalties on the company.
Getting out of the payroll tax debt trap
Thankfully, most cases of payroll tax debt don’t involve failing to pay all taxes, so they are often not extremely difficult to resolve. Nonetheless, each year thousands of business owners owe more in payroll tax debt than they can afford to pay in full. The business may have gone through a slow period, suffered a significant loss or become saddled with crushing debt. Many times, these are temporary problems, and the business can become profitable again, provided it survives the payroll tax debt storm.
When you owe back taxes, it’s easy to feel like the IRS is aiming at a target on your back. In truth, the IRS wants your company to pay the taxes, not go under. To help distressed businesses meet their tax obligations, the IRS has created several settlement programs specifically designed for resolving payroll tax debt.
The key is negotiating a settlement agreement the company can adhere to. A professional tax negotiator can deal with the IRS on your behalf, often resulting in a reduced balance and the removal of your individual tax liability. This allows for a fresh start where payroll tax debt plagues your business no more.
If you have an IRS tax dispute do not hesitate to contact our Tax Resolution Law Firm today. As a full-service Tax Law Firm, our Tax Resolution Attorneys are experienced in all cases involving tax resolution, tax dispute, and general issues relating to IRS tax and debt relief. Failure to report payroll taxes will lead to an IRS audit and severe penalties. Tax penalties include; failure to file, non-payment, failure to deposit, and failure to pay. The lawyers at our law firm, are extremely knowledgeable in the local, state, and federal tax code, and can help you today!
