Avoiding Payroll Tax Deposit Problems in a Slowing Economy

The credit crunch and economic downturn have many businesses, especially small businesses, looking for ways to make their funds go further. During times of economic stress, some business owners may be tempted to delay or not make their federal payroll tax deposits. The results can be devastating for businesses.

The economic downturn has everyone looking for ways to save money and do more with less, and businesses are no exception. Many small businesses with slim profit margins are especially buffeted by the current economic turbulence. Sometimes, when times are exceptionally challenging, business owners may look to "cut corners." Businesses with cash-flow problems may be tempted to use the funds they are required to withhold for federal payroll taxes to meet immediate obligations. This is a very dangerous tactic. Any short-term benefit will be lost when the government imposes harsh penalties. Remember, you are the government's collection agent for these taxes.

Penalties

The federal government can impose criminal and civil penalties for failing to collect and pay over employment taxes. The government has many tools at its disposal to sanction employers. The punishments differ depending upon whether the failure to pay was intentional or inadvertent and, in some cases, how long the failure lasted. Intentional mistakes are punished much more severely than inadvertent mistakes.

Potential payroll offenses include:

l failing to report or pay taxes;

l failing to collect and pay over after notice;

l failing to furnish, or furnishing false, forms or statements; and

l supplying false withholding information.

Responsible Person

Any person who is required to collect or withhold federal taxes from any other person and to pay them over to the government is to hold the taxes in a special fund in trust for the government until paid over. There is absolutely no flexibility to this rule. If taxes should have been collected but were not or, if taxes were collected but not paid to the government, the IRS then may assess a 100-percent penalty on the individual who is required to collect, account for, and pay over the taxes.

For many small businesses, this person would be the owner of the business. For larger businesses, such as corporations, a corporate officer may be the person responsible to withhold and pay over employment taxes. One court has even held that a financial institution that loaned funds to a bankrupt employer in order to meet the employer's payroll was a responsible person. In many cases, more than one person may be held as a responsible person liable for the entire shortfall.

Above all, skimping or failing to make payroll tax deposits is not the way to solve cash flow problems.