What to Do if Your Business is Behind on Payroll Taxes

An entrepreneur wrote an article for CBS Money Watch in which he described the year he almost lost everything. At the time, clients had fallen behind on paying him, and to make up for the cash shortfall, he stopped paying payroll taxes. His payroll tax liability grew to $20,000, plus interest and penalties, before the Internal Revenue Service seized $5,000 from his bank account, which in turn caused him to be overdrawn.

Small businesses that fall behind on payroll taxes may be jeopardizing their livelihood, as well as their personal property. At the outset, it is important to understand that payroll taxes include employee contributions for social security and Medicare taxes, and employee federal and state income tax withholdings. The employer collects employee contributions in a fiduciary capacity and the government is much less forgiving for a business failing to properly handle employee trust funds than for a business that fails to make its own tax payments. Not only will the business itself be liable for its failure to properly handle these trust payments, but also the owners, officers, and employees of the business may be held personally liable.

Read on to learn more about penalties for unpaid taxes and best strategies for paying payroll taxes.

IRS Penalties for Payroll Tax Liabilities

An unpaid payroll tax liability will result in IRS penalties, and the taxpayer will also have to pay any interest that accrues on outstanding taxes.

The IRS assesses payroll tax penalties in three ways:

Failure to file – Missing the filing deadline triggers a penalty, and if IRS investigators determine that a taxpayer made a “false material representation of facts,” the IRS can pursue criminal charges. Even if you can’t afford to pay your taxes, always file on time.

Failure to pay – Penalties for failure to pay will be based on the estimated taxes owed. When combined with a failure to file penalty, that amount can be significant.

Failure to deposit – If you miss your regularly scheduled payroll tax deposit, penalties are assessed as follows:

  • 2 percent for deposits one to five days late
  • 5 percent for deposits six to 15 days late
  • 10 percent for deposits more than 15 days late
  • 10 percent for deposits not made electronically.

When deposits are more than 15 days late, and a demand for payment letter has been sent to the taxpayer, an additional 5 percent penalty may be assessed on the tenth day after the notice was sent.

Simply put, the IRS will get the money it’s owed, one way or another. If you fall behind on taxes, the IRS may seize your business, business equipment, your bank accounts, and even your home, if you’re a sole proprietor or majority stakeholder in a business. And there are more consequences at the state level.

Maryland Payroll Tax Rules

Maryland law holds that a business owner is solely responsible for payment of taxes, even if another entity – such as a tax preparer or accountant – has been hired to handle taxes. So if an accounting professional should fail to pay taxes, or fail to pay on time, the state comptroller will hold the business owner liable for penalties and interest. The state can also prevent you from renewing your driver’s license and registration until your tax debt is paid.

Regarding bankruptcy, Maryland law says:

“Payment of your business taxes may not be avoided through bankruptcy proceedings because sales and use tax and withholding tax are not discharged in bankruptcy. If a bankrupt business does not have enough assets to pay the state taxes, the owners and specified corporate officers are personally responsible for payment.”

Staying Compliant

If you should fall behind on your payroll taxes, contact the IRS and the Maryland comptroller immediately. Your willingness to repay a debt could prevent further legal actions, such as a levy against your property.

To avoid making payroll tax mistakes, get advice from a licensed professional accountant, and a business attorney.

Lusk Law, LLC, specializes in assisting small business owners, helping them understand their obligations regarding tax laws. Our experienced attorneys have provided legal counsel and representation to businesses in Frederick County, Howard County, Baltimore County, Baltimore City, Carroll County, Washington County, Anne Arundel County,  and other Maryland jurisdictions. We also represent clients in DC, Virginia and Pennsylvania and assist clients throughout the country with tax issues. Please call us at 443-535-9715 or fill out our contact form if you have any questions about this topic.

What are the Types of Business Structures?

Before you launch a small business, two questions you should consider are: What are the types of business structures, and which one best fits my needs? The main types…