Payroll is dealing with your employees’ hard earned money – money they need to pay their “overhead,” like rent, car payments, etc. It should have special attention paid to it above and beyond your other business processes. If you decide to outsource your payroll to a third party (or already do), this article is not for you. This is for the DIY business owner who is considering doing payroll his/herself and wants to know important things to consider.
In a down economy, the IRS is put under increased pressure to bring in revenue. One of those revenue streams can come from business owners who try to skirt the legalities around payroll and payroll taxes. Let’s deal with these:
1. Payroll taxes need to be paid on time not just because it’s the law, it makes sense. And because you should be setting aside that money in accounts where it isn’t touched, payroll taxes need to be paid on time because otherwise you are going to start generating massive debt very quickly. The three big penalties that can be levied on you are failure to file, failure to pay, and failure to deposit. Believe it or not, those penalties can be stacked up to get to 33% plus interest within 16 days of your due date for your form 941 (Payroll Tax Return form). Robbing Peter to pay Paul isn’t a good enough idiom to express what is happening here: it’s more like robbing Peter to get completely robbed of everything by Paulie’s mafioso brother, the IRS.
2. Past due payroll taxes are not just something you’ll have to pay penalties and interest on. Sometimes you can lose your business. The IRS knows that plenty of small business owners are guilty of tax avoidance (not a crime) and that a few are guilty of tax fraud (definitely a crime). They feel that by focusing their attention on small businesses that everyone will be scared into compliance and that both tax avoiders and tax cheats will pay their “fair share.” When it comes to payroll tax debt, the IRS has pretty broad authority. They can lock up your front doors and de facto close you, even without a court order. They can pull up with a truck and seize your machinery and equipment. You’re not going to believe this last one, but they can even contact your customers and redirect your accounts receivable into their coffers to offset your debt!
3. You may not touch payroll tax funds. We’ve said on this blog numerous times that cash flow is incredibly important to a business. It’s arguably the most important thing. What we have to keep in mind is that even though many small businesses are bootstrapped, and often the payroll taxes are sitting in a separate account waiting for the quarterly filing, that we CAN’T TOUCH IT. It’s illegal. This isn’t to say that there aren’t honest, decent business owners who’ve found themselves between a rock and a hard place and have managed to replenish those funds before the quarterly filing and payment. We can’t advise you on individual situations. We can tell you that it’s illegal and you can’t mess around with it. Whatever your political persuasion, it has to be understood that part of operating a business in the United States means that you have to pay federal withholding tax, FICA ,and Medicare. Those funds belong to the US Government, not to the business owner.
4. Your corporate structure will not save you from the IRS. Who is the only creditor on planet earth who can pierce the corporate veil and go after individual shareholders above and beyond their invested (and limited) liabilities in that corporation? If you’ve read this far, you can guess: the IRS. They have a tool (aptly named) called the TFRP – the Trust Fund Recovery Penalty – which they can use against shareholders. Not a fun time. We listed this item last because it’s the scariest. The IRS going after your business is one thing – going after you personally is an entirely different experience.
If reading this article has scared you sober about handling payroll, good! We think there are far too many people who take payroll casually. We at FO will help you process your own payroll through Quickbooks or make sure that the provider you use gives you the proper reports to reconcile with your books. But we can’t make you “behave.” We hope that the article above helps you stay on the straight and narrow!