Tag: Payroll Tax Problems
Payroll Tax Problems?
What do you do if you haven’t paid payroll taxes in a while? Well, it kind of depends whether or not you have a revenue officer involved in the case or not. We’re just going to go ahead and assume that no one from the IRS at this point has contacted you regarding your Payroll Tax Problems.
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Now, you see, it’s partly the IRS’s fault that these payroll tax problems can get so big. You see, very often, it can take a year, two, three or even four years before the IRS notices that you’re not filing your form 941 and you’re not paying your payroll taxes on time, and so it can spiral out of control very quickly.
I would say my number one piece of advice for people that are having or experiencing payroll tax problem difficulties would be you need to get current immediately. What does that mean? Well, it means that you need to go ahead and start making your regular tax deposits on time. Now there are certain depositors that are monthly depositors, there are certain depositors that are weekly, daily, and I think there’s even depositors that have to make more than one deposit a day for the payroll taxes. But I would guess that the most people that are watching this video are either monthly depositors or weekly depositors. So you need to start making your deposits on time.
You see, I talk to a lot of small business owners and they say, “you don’t understand, Darrin, I can’t pay my payroll taxes because I can’t hardly make payroll as it is…” or “I can’t pay the expenses as it is.” Well, I know this is harsh and I know you don’t really want to hear this but if you can’t pay your payroll taxes, then you can’t afford to stay in business.
So what can you do? Well, you can cut staff, you can cut employee, or you can cut some other area of your business but if you continue not paying or failing to pay your payroll taxes, bad things are going to happen to you. I promise you that. It’s not me that’s going to do it; the IRS is going to come down on you like ton of bricks.
As a tax attorney, I need to explain a rather complex principle and I don’t know if I have time in this video but here is a try. I want you to imagine a circle, a pie or a pizza. We’re going to cut that pizza down the middle. Not quite fairly. There’s going to be a small half and a big half. So I want you to imagine in your mind a pizza where it’s cut where maybe one side is 60 percent and one side is 40 or 65/35 – something like that.
Now, this large half is going to represent the employee’s FICA, Medicare and unpaid federal income tax. Let me say that again.
The employee as you know, in a corporate setting, pays half of the FICA (that’s the social security), half of the Medicare, and all of the federal income tax. Now on the smaller half, that is actually the employee’s matching portions; so that’s half of the FICA, half of the Medicare and all of the unemployment tax.
Now this larger half – remember, that goes back to the employee’s share – that is actually called the trust fund portion of the tax. Why is it called that? Well, it’s called the trust fund portion because that’s what the employer holds in trust for the US government and for the employee to a limited extent. So they hold that money in trust, in theory, and they turn it over in the form of normal deposits for the benefit of the government and the employee.
Well, when you fail to do that, what you’ve done is you violated that trust, now you have a trust fund problem. So if your business were to go under, for example, or if the business just fails to pay and the IRS catches up with you, the IRS is going to go ahead and assess that trust fund amount – so that 60-65%, something like that (it’s hard to find exactly because it varies in every case) – but that trust fund amount they’re going to assess against responsible individuals. Who does that mean?
Well, that means the people at the top, the people that makes the decisions to hire or fire, the people who decide to pay vendors instead of the IRS, the people who sign checks, the people that sign 941s, the people on the bank signature cards… there is a whole laundry list of criteria but it basically means you, if you’re a single person, a corporation or a limited liability company. So they’re coming after you. So it’s something very important to know. You need to get current with your taxes. If you can’t get current with your payroll taxes, this problem will spiral out of control and it will never, ever end. It just spells disaster if you don’t get current.
Now, interestingly enough, if you make payments, voluntary payments – payments out of the goodness of your heart to try to catch up with your back tax problem, the IRS is going to designate those payments to pay the non-trust fund portion first. Why is that? Well, because that’s what’s in the best interest of the government. You see, they’d rather have you pay the non-trust fund portion off first because, in the likely event that you can’t afford to pay it all off, they still can come after you as a responsible individual.
By the way, the imposition of that trust fund obligation on you is called the Trust Fund Recovery Penalty. We will probably do more videos about that in the future.
What you can do if you know that you’re in trouble and you have some money to throw at the problem, while also being current, you’re going to want to go ahead and designate those payments to go toward the trust fund portion of the total tax obligation. That way, it comes off of the corporation’s overall obligation but it also comes off of that portion of the obligation that you could be individually held responsible for.
Most payroll tax problems work out being installment agreements. In business, Offer in Compromise don’t usually work and there’s some rationale behind that but the IRS has a strong public policy against making deals with companies that don’t pay their payroll taxes. So, most companies end up in installment agreements when they have payroll tax problems. And my rule of thumb is that most of those installment agreements are going to have to pay out within two to three years, sometimes it can be longer, but I would say that’s a fairly accurate depiction of the situation. Payroll Tax problems can be extremely complicated as I’m sure you just noticed from this rather technical article.